There are several different ways to structure a business operation, each with pros and cons, which are thoroughly analysed when setting up a business. The structure may not remain suitable for the life of the business, or perhaps more relevantly for the life of the business owner. As you approach the twilight of your working life, you certainly don’t want the structure of your business to either compromise your business value on exit or create difficulty in implementing a succession plan (https://accru.com/2018/11/succession-planning-a-process-beyond-the-balance-sheet/).
Before looking at restructuring a business, it is worth taking a brief look at some of the key points to business structuring.
Generally speaking, in Australia, you would expect to operate a business in one of 4 main forms:
- Sole trader
- Trust (discretionary, unit or hybrid)
- Company (private, public, listed)
When first establishing the business and choosing a structure you will often need to evaluate, weigh up and trade-off these key factors:
- Flexibility regarding profit distributions, capital distributions and voting power/decision making
- Tax efficiency
- Involvement of others, either at the start or in the future
- Asset protection
- Legal restrictions on the structure
- What helps you sleep at night
The need to restructure can be driven by several different factors including:
- involving other people either during your ownership or as part of your exit strategy
- seeking enhanced asset protection after the initial growth phase of your business
- seeking greater flexibility with profit distributions
- needing to comply with regulatory restrictions for Government grants
- inserting a holding company over the top of multiple operating entities
The involvement of other people in this instance could be family members, unrelated people or others already involved in the business. For example, you may want to involve management as part of an incentive scheme with access to profits or need to incorporate to access Federal R&D rebates.
Alternatively, you may have a mixture of business and investment assets in your existing structure and wish to separate them for asset protection. This is particularly relevant if you see retirement on the horizon or wish to add adult children to the business but not yet the business property.
How to restructure and traps to avoid
Transaction costs can be significant if a restructure is not done correctly, which includes preparing and executing the appropriate documentation. Certain assets can trigger stamp duty on restructure, whilst income tax can arise for trading stock and depreciable assets and capital gains tax (CGT) can arise for goodwill, property and value shifting. These costs can be particularly harsh if it is an internal restructure that doesn’t involve an injection of cash or sale of interest.
Small business and/or incorporation restructure comes with a variety of CGT rollovers, deferrals and concessions in the right circumstances. This includes restructuring for an ongoing business as opposed to a restructure simply to create a better tax outcome on an impending sale and Small Business CGT Concessions which are generally applicable on exit. However, many of these CGT mechanisms won’t include income tax concessions in relation to trading stock and plant and equipment, so care must be taken in evaluating them.
For a trading group with multiple entities and a need to reorganise several assets, there is the option of income tax consolidation which can be a particularly complicated process depending on the assets within the group and the tax profile of each participating subsidiary.
It is important to highlight that concessional treatment for reorganisation and restructure is not uniform across all transaction costs, so specialist advice is recommended to cover off income tax, CGT, State taxation and any Corporations Law requirements.
As well as there is a no one-size fits all approach to business structure, there is not necessarily a once and for all business structure for the same business owner. Whether you are looking to exit the business and retire to more family and leisure time or start formally introducing the next generation, don’t let your existing business structure compromise your current business value and suitability.
To discuss your current business structure or to clarify any points made in this article, contact your Local Accru Advisory Specialists today.