What does your corporate structure say about you? Does it showcase a sensible balance of risk mitigation, asset protection and streamlined administration? Or does it undermine proceedings, leaving the business exposed, unveiling your lack of understanding and thoroughness?
Having a thoughtful and well-implemented structure matters, period. Investors (including employees under an employee stock ownership plan), acquirers, future directors and strategic advisors will fully expect that this important hurdle was jumped at the early stage of the business lifecycle and especially prior to significant value being realised.
The adage - “do it right the first time” – could not be more true. If you intend on adopting an alternate structure later down the track, it is often prohibitive from a tax perspective, and you literally cannot afford to or can’t justify paying an exorbitant tax bill without a liquidity event. So, it’s imperative you seek the advice of professionals.
But who rules the roost? The accountant or the lawyer? The answer: neither. It is important that you triangulate a series of data points and understand the critical elements each of them raises. Pro Tip: Getting them together in the same meeting also helps you avoid getting lost between them. Just keep your eye on the clock.
This discussion will intentionally skip right on past concepts like sole-traders or partnerships which are more attuned to micro-businesses. While they are inexpensive to setup, they are wildly inappropriate for those aspiring to create enterprises of reasonable size and scale. In short, they are littered with personal liability, they do not allow for concepts like shareholders and they don’t always qualify for various grants/tax incentives.
This leaves us with companies and trusts as the predominant vehicles to implement in our company structures and each have a list of pros and cons. Trusts are mostly used for holding assets and companies are used for operating the underlying business or division. Many accountants will tell you that an operating trust is a perfectly fine vehicle, and are in fact, simple for family business affairs and taxation; this is true, but for those building enterprises for investment, sale or scale, it’s better to leave them in their rightful place.
Many businesses exist as just one company, one legal entity. This company does everything from owning assets, employing the team, entering into transactions/agreements, holding intellectual property, procuring debt, accepting shareholder investment, entering leases, and the list can go on and on. You can already hopefully see the stark difference in some of these activities; put simply, you need to segregate your important assets from operations that carry risk, when that is practical and possible.
With these concepts introduced, I present a list of thought starters to help you on your quest for optimising your group structure:
- Get advice early - It can be easy and somewhat inexpensive to get right from the start. The longer you wait, it will get harder, more expensive, and perhaps impossible;
- Triangulate information - Between lawyers, accountants, and other entrepreneurs;
- Use of trusts and companies - Think intently about where and how each could be used. Educate yourself;
- Do not neglect your own personal structure - Just like a business, you should consider your own personal and family structure. Take the same level of consideration into this arena too;
- Protect IP - Identify all the important business IP and hold it separate to the operations of the business. This part you should involve your lawyer;
- Separate business units - If the operations and risk of parts of the business are wildly different, consider them as standalone entities. It will also force you to report them separately;
- Document everything - You should have your corporate structure on hand, including demonstrating how and how you arrived where you have;
- Consider tax consolidation - Some entities may be profit centres, some might be cost centres, a tax consolidation will rebalance this out and summate them to ensure no tax leakage;
- Consider a parent/holding entity - It is common that your group structure has a parent entity. This is where you will want to consolidate operations, hold shareholding and perhaps debt;
- Understand the practicalities - If you have multiple entitles, this means more bank accounts, different accounting files, managing contracts and payroll in the right entities and overall, more emphasis on administration and accounting; you need to be “up for it” and make sure you have communicated this across your business and advisors;
- A new entity is not always the answer - You can become trigger happy, in setting up new companies for everything. This will ultimately be cumbersome and expensive; and
- Paying no tax is not a realistic expectation - Obviously pay the least possible. Just think carefully about complex international structures, their purpose and get a second opinion.
Remember that good structuring is built on the foundation of risk management, a splash of taxation and a hint of pragmatism. Get ahead of this and start socialising these questions with your advisors, colleagues and stakeholders.
This article should not be considered advice. Each situation is unique and requires personalised consideration of the facts.
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