I recently went for a ride in a Ferrari driven by the boyfriend of one of my daughters. As he put his foot down on the big V8 the force that went through the car pushing me hard into the seat was amazing. The engine and the structure of the car were beautifully balanced for maximum performance.
Just like the Ferrari your business performs best when it is has the right structure for it. The best time to adjust your structure is at the start of a new financial year, which is fast approaching.
In getting the right structure there are a number of things to consider. The first is minimising the risk of losing your personal assets should something go wrong with the business or legal action be taken against your business.
If you act as a sole trader or in partnership as an individual the business, you are one and the same legally and so all your personal assets are at risk. If something goes wrong with the business your house could be taken from you.
By operating the business through a company in its own right or with a company as trustee of a trust, you and the business are not the same. This means that you have a structure that can keep your house and personal assets separate and protected if the business gets into trouble.
Likewise you would want to keep your business property & valuable equipment safe as well. Placing this in a different structure to your business can provide the desired protection.
The second area to consider with the structure of your business is the tax implications. If you are planning on selling your business for more than you purchased it then you will want to minimise the capital gains tax from that sale. A trust structure gives you the flexibility to be able to pay no capital gains tax. Whereas, with a company, you will generally pay tax on the capital gains.
A company on the other hand enables you to retain profits in it and only pay 30% tax on those profits. For larger operations it is possible to have the operations in a company and the business & intellectual property in a trust.
However, that leads us to the third consideration of choosing a structure; simplicity. You would not put a Landcruiser structure on a Corolla engine. It would perform poorly and be expensive to run. Complex structures on a small business are hard to understand and expensive to manage. For that reason the end of the financial year is also the time to consider whether you have any structures that are no longer necessary and whether you can mothball them or deregister them.
The final consideration is flexibility. Businesses and tax laws change. You want a structure that can grow and adapt with your business.
It can be expensive to change structures so getting it right to start with is important.
I’m sure we all would like our businesses to perform like a Ferrari. One part of that we can work on is the structure. Enjoy the ride!
Peter Ambrosiussen is the principal of Ambrosiussen Accountants & Advisors www.ambrosiussen.com.au
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Published by Toowoomba Chronicle www.thechronicle.com.au on Saturday 1 February 2013