Most business owners want to build a scalable business with strong brand recognition. Initially, their focus is firmly on product development in order to produce a useful and saleable product or service.
In these early stages of development, implementing a robust commercial structure might seem like an unnecessary task. At Propel Business Group we understand – you want to get the product right first, then figure out the details as the business starts picking up and expanding or when operational issues become more necessary to address.
Unfortunately, moving your business structure down the list of priorities can cause major problems later on. Once your business has started, tax and legal roadblocks can make changing your structure complex and costly.
If a restructure isn’t implemented carefully, you could find it triggers an unwanted tax liability for the business or its shareholders on the unrealised value of the entity. This could happen at a point in time before the business has actually generated any surplus cash to pay for these liabilities.
Avoiding issues like this makes it important to think ahead and obtain advice early. By establishing a structure that is robust but flexible enough to support the business and its activities now and into the future the more likely you are to see greater positive returns.
So, how do you decide which business structure is best for you?
There are commercial as well as tax issues you need to consider. We’ve compiled this list for you:
- Tax: Tax is an important consideration, but it should not be the key driving force for choice of structure. Consider how the structure is taxed on its profits, how your personal income and drawings are treated and how any capital gain that you may make on the sale of the business will be treated, in order to maximise your return upon sale.
- Commercial acceptance and operations: It’s important to have a structure that is commercially acceptable and easy to deal with. This may not be quite so important if you’re dealing with individual consumers, but if your customers are other businesses or government departments in particular, they can have strong opinions about the type of business structures they will engage with. Most government departments, for example, will only deal with corporate structures. Banks, insurers, landlords and other third parties important to the operation of your business can also treat businesses differently based on their structure. You also need a structure that is scalable and can grow with your business and its changing needs. Once again, this comes back to planning for the future and choosing a structure with flexibility to accommodate different opportunities the business might face as it evolves through various stages of growth and maturity.
- Asset protection: Safeguarding business and personal assets. Many individuals overlook this aspect when establishing their business and run into problems down the line. How do you adequately protect your assets against creditors and other third parties if something goes wrong? There is no simple answer. The best way to protect an asset is to have a number of protection mechanisms in place.
- Intellectual property protection: Most businesses have a central core of some form of valuable intellectual property (IP) that has been developed. This IP will usually be developed in a structure which then becomes the trading entity. The IP could be protected by a patent, or other rights such as a copyright, but also needs to be protected from the trading and operating risks that arise. This is usually achieved by having the IP in a separate structure to the trading entity. The IP entity will then license the use of the IP to the trading entity.
Forward planning is also needed when deciding which entity will own IP, as moving IP from one entity to another can create legal problems and where the IP has value, you could also find you crystallise an unwanted tax liability as well.
- Investor-friendly and ready: It’s important to think about the funding needs of the business and your options for obtaining funds. For businesses that intend to raise capital through private equity, the structure needs to be both investor-friendly and investor-ready. Almost all professional investors will only invest in a business with a corporate structure, as it has clearly defined shareholders rights. Another funding option might be government grant programs. In many instances, only companies are eligible to claim or apply for these programs, which can provide substantial amounts of cash to support business activities. The Research & Development Tax incentive is one example.
- Exit: A successful exit strategy is what most aspiring business owners want. Having a structure that provides choice and flexibility as to how you might sell the business is important. In the case of a company structure, you have a choice to sell the shares in the company or the business separate from the structure. Each option has different commercial and tax implications and both are important to your investment in the business, and that point in time when you eventually want to realise and extract some or all of it.