The importance of your business structure
Posted by Northadvisory on September 17, 2019
Determining the correct structure for your business is one of the most important processes you can undertake.
Many facets of your business and your personal life can be impacted by the choice you make, so it’s crucial that you select the most appropriate structure for your circumstances.At North Advisory, we believe in learning as much as possible about your situation and your needs.
We can provide you with guidance and help you set up your business so that it can truly succeed.
Gather all the information
The first step in the process is one of discovery. Many people jump too quickly into thinking they know what’s right and don’t take the time to gather the necessary information. But a quick decision can sometimes lead to a negative outcome, so we always recommend looking at all aspects of your life and the business.
Martin van der Saag, North Advisory’s Founder and Strategic Advisor, explains,
“You have to analyse the client’s entire set of circumstances to determine what is going to be appropriate for them.
There’s a lot of information on the web that you can read and think you know what’s going to suit your needs… but it’s like being sick and Googling your symptoms. You are always best off going to a doctor for your diagnosis; it’s the same here.
We can analyse your needs, outline the benefits of various structures and make a recommendation based on our knowledge. This is where much of our skill lies.”
As part of the information gathering process, there are many specific factors that should be considered. Martin continues,
“Family is particularly important here. With so many different family models we need to have a very clear understanding of your situation. Whether you have a spouse, any dependants, the age of the dependants, whether they live in Australia or overseas… all these factors would have some influence over the type of business structure you might require.
We also need to find out everything about the business…
How many owners and who is in control?
Will you be borrowing money to start the business? How are you going to fund the working capital?
We need to identify how risky your business is… for example are you working in an industry with little chance of litigation? Or are you in a high-risk industry such as construction?
Do you have any assets? If you do, we need make sure they aren’t exposed to the liability of the business. The last thing we want is a client to risk losing their personal assets because something happens within the business.
We also need to look at how company profits should be distributed to maximise tax efficiencies. There are all sorts of nuances that we need to ascertain and identify so that we can select the most suitable structure.”
Once we have completed our discovery session, we can help you decide which structure best suits your business and work through the set-up process with you.
This is the business type that most people already understand. A sole trader is a straightforward trading entity and doesn’t need any specific structure set up.
A sole trader is an individual running a business. It is the simplest and cheapest business structure.
If you operate your business as a sole trader, you are the only owner and you control and manage the business.
You are legally responsible for all aspects of the business. Debts and losses can’t be shared with other individuals.
This type of business is extremely easy to start, however the disadvantage with being a sole trader is that any personal assets in your name are exposed to any liability of the business.
The next step up from sole trader is a partnership.
A partnership is a group or association of people who carry on a business and distribute income or losses between themselves.
For example, if you and a friend or family member decide to set up a business together, you might operate it as a partnership.
A partnership is relatively inexpensive to set up and operate.
The partners share income, losses and control of the business.
A written partnership agreement is not essential for a partnership to exist but is prudent.
A partnership agreement should outline how income or losses will be distributed to the partners and how the business will be controlled.
The key thing with a partnership is that each person is responsible for the decisions made by all business partners. This means you can incur liabilities that you might have not be involved with. Martin explains,
“Within a partnership, each partner is liable for any risk. This means that any creditor of the business can seek to retrieve funds or assets from anyone within the partnership… regardless of who initiated the original debt.
Just because you are 50/50 partners, doesn’t mean you have only 50% of the liability. Because of this, a partnership can carry more personal risk as it’s not only your debt.”
A company is a recognised legal entity that is run by directors and owned by shareholders.
The Australian Securities and Investments Commission (ASIC) regulates companies and there are specific registrations that must be completed. We find that this is often the business structure that people believe will suit their needs, but after we do our assessment it might not be the most suitable.
Martin discusses an example of this,
“Some industries have high levels of workers compensation insurance and once the company owners start to receive high salaries, there can be significant costs involved.
To make the process more cost effective there are alternative structures we could incorporate that enable the directors to receive payment without incurring the extra costs.
It is in this type of unique situation that we can deliver value to our clients.”
The final business structure we can consider is a trust. Again, Martin explains,
“A trust is basically a relationship between two entities. There is a ‘trustee’ which we usually recommend be a company, then there is a ‘trust’ which is a document that says the trustee will manage the assets of the trust for the benefit of the beneficiaries.
We often use trusts when making our recommendations to clients and there are two different types that are very useful.
First is a discretionary family trust. This allows the trustee to distribute the business income on a discretionary basis. The income is distributed amongst the beneficiaries however they see fit. In this instance the power rests with the trustee.
Then there is a unit trust. This is more suitable for businesses that will be owned by one or more family interests. You can trade units just like you can trade shares of a company.
We like to work a lot with trusts; they are more complicated but there is so much more flexibility and the benefits can outweigh the additional complexity.”
Once your business structure has been established, North Advisory can continue to help you through the evolution of your business.