When you first start your business, your goals and objectives are often different to the objectives of a business further along in its life cycle. Once you have completed your initial objectives, such as building a customer base and being able to survive the initial cash shock of a start-up business, your business structure may change as you reassess whether your initial structure is still the most appropriate.
As a business matures, priorities change. An initial emphasis on survival and success can give way to taxation of profits, asset protection or succession planning. So where is your business now? It may be time to consider if your current structure is still appropriate for you.
Different businesses will have different priorities. Following are key issues that may impact on your business structure decisions.
Taxation of Profits
The profit generated by your business is taxed differently based on your structure. If the profit is ultimately taxed to an individual via a sole trader, partnership or trust, the tax liability can be anywhere between 0% and 47%, depending on the taxable income. If a company’s profit is taxed, the tax payable is a flat rate of 27.5% for a base rate entity or 30% for other companies.
Retention of profit in the business
All businesses are focused on their cash flow and the funds that are available when it comes to financing their operations. Many businesses find themselves with a healthy profit in their financial statements, but then they ask where the cash is? Funds have generally been reinvested in fixed assets or additional stock. This can cause problems in a trust structure when you need to pay the distribution to the beneficiaries, as there may simply be insufficient funds available to pay this distribution. And doing so may damage the business by limiting the funding of its business operations.
Liability of owners and asset protection
The liability of the owners for the debts of a business vary greatly depending on the structure of their business.
A sole trader or a partner in a partnership is liable for the debts of the business. Personal assets as well as business assets are at risk if the business cannot pay its debts.
The trustee of a trust is liable for the debts of the business. The assets of the business and trustee are at risk if the business cannot pay its debts.
A company has limited liability for the shareholders. The shareholder is liable to pay the original purchase price of the shares and the assets of the business are at risk. However, only the value of the shares is at risk for the shareholder.
Different structures have different obligations and cost structures attached. This can become a consideration in the choice of structure for your business. Often this is a critical factor at the commencement of the business. However, later in the life cycle the tax benefits or asset protection may be of more value to the business owners.
When selling your business or amending the ownership of your business, certain structures allow for an easier transfer of the business. Potential tax liabilities may arise on the sale of the business, but these will vary according to your business structure.
There are options available in the Income Tax Assessment Act that allow rollover relief for capital gains to be applied in specific circumstances. For example, if you are operating your business via a trust, you can move the business operations into a company and obtain rollover relief if you satisfy the requirements. Stamp duty is also a consideration. However, this differs depending on which state or territory the business is in. The value of goodwill is always a critical factor in these transfers. Due to the current economic situation, the value of goodwill is likely to be reduced. If you were planning on a change in your business structure for a long-term benefit, it may therefore be a good time to go ahead.
A change of structure may provide benefits for you and your business. As your business evolves, you should recheck your current structure and ensure it is the right one for you. If in doubt, there are options available that your local Accru advisor can assist you with, in order for you to achieve your goals. Please contact us to discuss these options.