When starting a new business or considering an investment, one of the most important decisions you need to make is choosing the appropriate structure it should be operated or acquired through. This decision holds significance not only for new business owners but also for those involved in subsequent ventures. In this article, we will discuss the key factors to consider when selecting a business or investment structure.

Why is business structuring critical?

Selecting the correct business structure is crucial for several reasons:

Asset protection

Asset protection is a critical consideration when choosing a business or investment structure. Contrary to popular belief, it should be prioritised over tax exposure. The right protective structure can make a significant difference in protecting your personal or other business/investment assets in the event of business failure or legal claims.

By selecting an appropriate business structure, you can limit your liability to only having to pay out statutory amounts, rather than risking losing everything or facing bankruptcy. It is important to organise not only the overall structure but also define the roles within it. This includes appointing directors or trustees who will oversee the operations and decision-making processes.

Layering sub-structures can provide an additional layer of protection. By ensuring that no assets are held personally, you safeguard yourself against non-business-related claims. This means that even if someone were to make a claim against you personally, your business assets would remain protected.

Overall, asset protection is paramount in safeguarding your personal wealth and minimising the risks associated with your business or investment. Choosing the right structure and organising roles within it, as well as implementing sub-structures, can provide the necessary protection to shield your assets from potential threats.

Tax exposure

Minimising tax exposure is an important consideration when selecting a business structure, although it should be secondary to asset protection. The right structure can help minimise the maximum required level of income tax on an annual basis, as well as on disposal (i.e. capital gains).

Different structures offer various tax advantages and concessions. For example, certain structures may be eligible for capital gains tax concessions, discounts, or other tax concessions. By carefully selecting the appropriate structure, you can take advantage of these benefits and optimise your tax position.

While tax exposure is a significant factor, it should not take precedence over asset protection. Balancing both considerations is crucial in choosing a business structure that provides the necessary protection for your assets while also offering tax advantages and concessions where applicable.

Continuity and succession

Continuity and succession planning is an important aspect to consider when selecting a business structure. Different structure types have varying lifetimes, with some structures like companies being able to continue into perpetuity.

Choosing a structure that allows for seamless transition of business ownership from one generation to another is beneficial. Certain structures, such as trusts, can facilitate smooth succession planning with limited or no changes and associated costs. This ensures that the business can continue operating without disruption and that the ownership transfer process is efficient.

Considering the long-term goals of your business and the potential need for succession planning is crucial. Selecting a structure that supports continuity and allows for easy transfer of ownership can provide stability and peace of mind for the future.

Compliance with industry requirements

Compliance with industry requirements is a significant factor to consider when choosing a business structure. Certain industries, such as the medical or pharmacy sectors, may have specific regulatory requirements that dictate the type of structure you must use.

It is essential to thoroughly research and understand the industry regulations and legal obligations that apply to your specific business. This will ensure that you select a structure that complies with these requirements and avoids any potential legal issues or penalties.

By choosing a structure that aligns with industry requirements, you demonstrate your commitment to compliance and create a solid foundation for operating within the industry. Consulting with industry experts or seeking professional advice can help ensure that your chosen structure meets all necessary regulations and standards.

Different types of business structures in Australia

Sole trader

A sole trader is the most basic and inexpensive form of business structure in Australia. It is commonly chosen by individuals starting a business without the assistance of an advisor. As a sole trader, you have full control over the business, but you are personally liable for all debts and claims.

Advantages

• Simple to establish and maintain.
• Lowest cost of all business structure options to set up and maintain.
• Complete control over business assets and decision-making.
• Easy to upgrade the structure as your business grows or close it down if not successful.
• Potential ability to offset any losses with other income.

Disadvantages

• Limited asset protection, which means your personal assets are at risk if the business encounters financial difficulties or legal claims.
• The individual is personally taxed on all profits generated by the business.

A sole trader structure is a straightforward and cost-effective option for starting a business. However, it is important to consider the limited asset protection and personal tax liability associated with this structure. As your business grows, you may need to evaluate whether upgrading to a different structure that offers enhanced asset protection and tax benefits is necessary. Seeking professional advice can help you make an informed decision based on your specific circumstances.

Partnership

A partnership is a business structure that involves two or more individuals or entities operating a business together. It is similar in many aspects to a sole trader structure but with multiple owners.

Advantages

• Simple to establish and maintain.
• Relatively low cost to set up and maintain compared to other structures.
• Joint control of business assets and decision-making among partners.
• Potential ability to offset any losses with other income of each partner.

Disadvantages

• Limited asset protection as all partners are jointly and severally liable, meaning all assets of all parties are at risk if the business encounters financial difficulties or legal claims.
• Potential disputes over profit sharing, as partners may have differing expectations or contributions to the business.

A partnership structure offers a simple and cost-effective way for multiple individuals or entities to collaborate and operate a business together. However, it is important to consider the limited asset protection and the potential for disputes over profit sharing. Careful planning and clear partnership agreements are essential to mitigate these risks and ensure a smooth operation. Seeking professional advice can help you establish a well-structured partnership and address any specific concerns related to your business.

Trust

A trust is a business structure where a trustee carries out business operations on behalf of beneficiaries. It is not a separate legal entity but rather an entity that holds assets for the benefit of a family group or unitholders. The most common types of trusts are discretionary (“family”) trusts and unit trusts.

Advantages

• Reduced liability when a company acts as the trustee (referred to as a “corporate trustee”).
• Assets held in a trust are protected compared to holding assets personally.
• Flexibility in allocating income for tax purposes, among family members.

Disadvantages

• Higher establishment and maintenance costs compared to sole trader and partnership structures.
• More complex to dissolve or make changes to.
• Profits must be distributed to beneficiaries each year and taxed at their individual levels.
• Inability to distribute losses, which are retained within the trust until they can be utilised in the future.

A trust structure provides benefits such as reduced liability, asset protection and flexibility in income allocation. However, it comes with higher costs, complexity for dissolution or changes, and restrictions on loss distribution. Trusts are particularly suitable for smaller family businesses and situations where asset protection and income distribution among family members are important considerations. It is by far the most common structure for investments. Seeking professional advice is crucial to properly establish and manage a trust structure according to your specific needs and goals.

Company

A company is a separate legal entity that owns assets, generates profits and pays taxes accordingly. It is the most complex business structure but is widely used due to its ability to adapt to changing tax landscapes.

Advantages

• Limited liability for shareholders, protecting personal assets.
• Easily understood by most stakeholders, as it is a well-established structure.
• Ideal for situations involving unrelated parties or when introducing additional investment capital.
• Ability to carry forward tax losses to offset against future taxable profits.
• Simplified transfer of ownership through shares.
• Taxation capped at the relevant corporate tax rate (currently 25% for small businesses and 30% for others).
• Flexibility in releasing profits to shareholders to achieve desired tax outcomes.

Disadvantages

• Higher establishment and maintenance costs compared to other structures.
• Complex reporting requirements, including financial statements and annual compliance obligations.
• Inability to distribute losses to shareholders, limiting their utilisation to offset against other income.
• Not eligible for the 50% General CGT Discount.

A company structure provides advantages such as limited liability, ease of understanding, flexibility in profit distribution, and the ability to carry forward tax losses. However, it comes with higher costs, complex reporting requirements, and limitations on loss distribution. Companies are particularly suitable for scenarios involving multiple stakeholders, significant investment capital, and long-term growth plans. Seeking professional guidance is crucial to properly establish and manage a company structure, ensuring compliance and maximising its benefits for your business.

Is your current business structure no longer suitable for you?

It’s crucial for businesses to regularly review their chosen business structure to ensure it aligns with their current and future needs. What may have been a perfect business structure at the time of establishing your business may no longer be optimal due to changes in the business environment, growth, or other factors such as tax law changes. By conducting periodic reviews, businesses can identify any gaps or inefficiencies in their current structure and make informed decisions about potential changes.

When considering a restructure, it is essential to evaluate several factors, including:

• Suitability of the new structure: Determine what would be a more appropriate structure given the current and anticipated future needs of your business. Consider factors such as liability protection, tax implications, governance requirements, and future scalability.

• Cost considerations: Assess the potential costs associated with the restructure. This can include taxes such as income tax and GST, transfer duty, establishment costs for the new structure, and fees for professional advisors or accountants who can assist with the process.

• Impact on customers/clients: Consider how the restructure may impact your customers or clients. Will there be any changes in terms of contracts, pricing, or service delivery? Communicate any changes effectively to minimise disruption and maintain strong relationships.

It’s worth noting that there may be concessions or assistance available to help businesses with the costs involved in restructuring. Staying informed through our blog articles or seeking guidance from our experienced team who can provide valuable insights and support throughout the process.

Remember, each business is unique, and the decision to restructure should be based on a thorough analysis of your specific circumstances. Consulting with professionals who specialise in business structures and taxation can provide personalised guidance tailored to your needs.

Conclusion

Selecting the right business structure from the outset is crucial for long-term success and avoiding potential complications. It is important to consider your business goals, current circumstances, and future aspirations when choosing the most suitable structure. Involving relevant stakeholders and seeking professional guidance can ensure that all perspectives are considered, and the optimal structure is chosen.

At Regency Partners, we understand the complexities of business structuring and the importance of aligning it with your unique needs. Our experienced team will guide you through the process. From day one, we can help you assess your goals, personal/family circumstances, income levels, and asset holdings to determine the correct structure for your business.

Don’t navigate the complexities of business structuring alone. Take advantage of our expertise and personalised approach to ensure your business is set up for success. Contact Regency Partners today to discuss your business goals and let us help you select the optimal structure that aligns with your vision for the future.