The most common approach of many, when establishing a business structure, is to incorporate a company with the founder (and spouse) as shareholders. It is quick, cheap and basic, at a time when seed capital is tight. Sadly, the business structure is rarely reviewed as the business grows and circumstances change. A crisis or event (including a sale) usually triggers an assessment of the structure and, in our experience, a desire to change it and “get it right”. Of course this usually occurs when the business has value and the cost of a restructure is prohibitive, or it’s simply too late.
In this alert we will briefly overview:
- Considering the right structure
- Tax Concessions – in the event of a restructure
- Some final tips
Considering the right structure
The following factors are integral to the consideration of any business structure:
- Tax Efficiency – of operations, including the availability of deductions (and losses) and access to government grants
- Risk mitigation (personal asset protection and business risk)
- Effective and cost-efficient Wealth Extraction – for the owners
- Addressing any Estate Planning issues that may arise (“unplanned succession”)
- Capital Gains on eventual sale
There are a number of legal structures that can be used as a business vehicle. These included partnerships, discretionary or unit trusts, companies, partnership of trusts, and limited liability partnerships, in various combinations. Each has their benefits and limitations. The challenge, and expertise, is in balancing the many aspects of each of these alternatives in designing a structure that best delivers to the future needs of the business as it grows and the needs of the owners in achieving their financial goals. In order to design the right structure it is important to have a clear view of the end game:
- Is the business simply to generate an income stream for the long term or is it to be built and sold in, say, 5 years?
- Who is the likely buyer: Trade Sale? Management? Family?
- Will you be looking for equity investors along the way?
As a business owner, having an understanding of where the business fits into your overall personal wealth strategy is also critical. This will likely be the single biggest investment you ever make so getting it right is important.
In practical terms many startups do not have the capital to invest in a complex structure, especially when the business is still in the “concept” stage. Therefore, as a minimum the base structure should be flexible enough to allow a “bolt on” with minimal disruption or cost
The structure should then be reviewed regularly as the business grows and circumstances change. A cost benefit analysis should be undertaken to ensure that the expected benefits of any proposed restructure outweigh the cost, and disruption and inconvenience.
Tax concessions – in the event of a restructure
A restructure is a “transaction” that will have tax and possible stamp duty consequences, however concessions and rollovers exist to facilitate certain changes to legal structures. These include:
- Small Business Restructure Rollover (recently passed into legislation in March 2016);
- Small Business Capital Gains Tax (“SBCGT”) (Div 152 ITAA 1997) (not necessarily the same as Small Business Restructure Rollover relief);
- Capital Gains Tax Rollover relief – individual to company, trust to company, units for shares, roll-up of trust interests (Sub Div 122-A, 124-E, 124-G, 124-H, 124-M, 124-N ITAA 1997);
- Tax Consolidation regime;
- Stamp Duty – the removal of stamp duty of business asset (this does not apply to “land rich” entities) and
- Demergers (Div 125 ITAA 1997)
Under the right circumstances, the appropriate and prudent application of the above concessional and rollovers should allow restructures to be implemented with minimal tax cost. Given the above concessions are just that, “concessions”, they are extremely complex to both understand and implement. Good advice is, therefore, important.
Some Final Tips
We leave you with some final tips when setting up, and reviewing, your business structure:
- Don’t directly own the business (consider the use of a trust)
- Limit the role of your spouse/partner in managing, or being an officer of, the business where possible
- Separate business assets from the business (e.g. Land & Buildings, Intellectual Property)
- Ensure that the structure is flexible enough to allow additional investors
- Consider the use of trusts to hold valuable assets to preserve CGT concessions and enhance asset protection
Think of both the positive, “will the structure allow me to tax effectively sell the business for the price I want?”, and the negative, “if the business goes down how are my assets protected?”
In the right circumstances a restructure can be implemented relatively cost efficiently to, in our experience, deliver significant benefits. It is always worth having a specialist undertake a health check of your business structure to make sure that it is still fit “for purpose” in meeting your long term goals.
Whitehawk Advisors are specialist Strategic Commercial and Taxation advisors who have undertaken numerous structures and restructures to businesses to help the owners achieve their goals.