When is the right time to Structure your Business Affairs?
Rede Accountants Gold Coast, Brisbane & Byron Bay
We’re often asked by clients – “When is the right time to structure your business affairs?” In a nutshell, the correct answer is the day you start the business.
This is often not practical because you can’t predict the future. The business you started 5 or 10 years ago maybe a mere shadow of your current day business. For example, your sales may be 10 times what they were, you may have 50 staff now (there was just you 10 years ago) and you may have substantial assets. How could you predict such success?
The business model changes over time in a way you could not predict. For example, you may have merged with 2 or 3 business partners who have amalgamated their businesses with yours. You don’t want to spend money on legal and accounting fees to establish a complex business structure that may never provide you with any benefit.
What are the potential consequences if you don’t correctly structure your business?
1. Poor personal asset protection from business suppliers and creditors and The Tax Office. For example, if you are struggling to pay your bills on time after establishing your self as a sole trader with an ABN, you can be personally sued. Your home and other non-business assets are at risk.
2. Inefficient and inflexible taxation of business income. For example, if you operate as a sole trader all your income is personally taxed in your tax return. Meanwhile, your stay at home wife earns no income and pays no tax!!
3. Capital gains taxes can be minimised easier in some business structures than others. For example, trading companies do not receive some concessions.
4. The future cost of changing our structure can be expensive. This may entail unnecessary legal and accounting costs, capital gains taxes crystalised and expensive stamp duty to transfer assets.
Will the world end? Perhaps not it just pays to obtain legal and accounting advice when you go into business.
What should I do?
The first point to note is that there is no perfect business structure that will last your entire business career. However, the object is to structure in such a way that additional business entities and ventures can be easily ‘bolted on’ in the future.
Some structures may work for longer time periods if you select those structures on day 1. With that in mind, when you start a business select a business structure that is likely to avoid the first 3 consequences. That generally means trading in your name (sole trader) or in partnership should not be selected.
That leaves possibilities of companies and trusts. These are more likely to have longer-term benefits. Generally, a combination of trusts and companies provides a good balance.
Often new events require new structures to be brought into play. For example, you decide to buy a commercial property for your business to operate from. Usually, your accountant will suggest a new business entity be established to buy the property and then lease it to your existing business.
This is a basic discussion. You should consult your accountant prior to going into business and discuss your needs on a regular ongoing basis. If you would like some advice on how to structure your business affairs please contact us here.