Navigating Business Structures: Your Guide to Choosing the Right Path

So, you've developed a promising business idea, tested it with friends and family, and are now ready to take the next step. What comes next?

Understanding Business Structures

There’s a wealth of information available on the various types of business structures, including sole traders, partnerships, companies, and trusts. In today’s entrepreneurial landscape, many businesses opt for what’s known as a hybrid structure, which combines elements from two or more of these basic building blocks.

Key Choices for Small Startups

When it comes to small startups with limited budgets, you generally have two primary options:

1. A Company Owned by One or More Trusts: This is commonly referred to as a company structure.

2. A Company Acting as Trustee of a Trust: This is informally known as a trust structure.

In either scenario, establishing a company is crucial for taking advantage of limited liability benefits.

Choosing the Right Structure

Your choice between these structures will depend on several factors, primarily your short- and long-term goals. If you're aiming to build your business for a potential sale in the near future, a trust structure might be more advantageous. This is because it can simplify access to capital gains tax (CGT) concessions when selling assets from a trust.

Conversely, if you plan to operate your business for profit over the medium term, starting with a company could be beneficial due to the flat corporate tax rate.

A Note of Caution

We know there are accountants and legal experts who may argue against oversimplifying this decision. While it's true that the nuances can be complex, this framework serves as a solid foundation. Let’s delve deeper.

If your business primarily focuses on developing intellectual property (like software code, patents, or registered designs), placing these assets in a company is advisable. Selling such assets from a trust might mean missing out on CGT concessions, as they’re often treated as revenue assets. However, if you sell shares in a company that holds this IP, you could qualify for CGT benefits on the shares sold.

In contrast, if your main assets revolve around goodwill or trademarks, it may be wiser to keep these in a trust. Selling assets out of a company will not provide the CGT discount, while a trust structure will allow for those benefits.

Simplifying the Decision-Making Process

Feeling overwhelmed? Here are some guiding principles:

1. Always Include a Company from the Beginning: This ensures limited liability and can protect your personal assets. Additionally, forming a company signals seriousness to potential partners and investors. If you view the initial $1,000 investment for a company as too steep, it might indicate you're not fully committed to making your venture succeed.

2. Profit-Generating Businesses: If your goal is to create a business for ongoing profit without planning for a significant sale, a company is often your best bet. It’s ideal for family dividends and offers some asset protection through trust ownership.

3. Short- to Medium-Term Sales: If your intention is to sell in the near future and you don’t expect significant profits right away:

   • For Larger Acquisitions: Set up a new, “clean” company for the sale, transferring shares to the acquiring entity.

   • For Sales to Small Business Owners: Utilize a trust if developing goodwill or trademarks (like professional services), or a company if focusing on copyright, patents, or registered designs (like software).

4. A Combined Approach: If you’re attempting to address multiple goals simultaneously, consider investing in a dual business structure:

   • A Trading Company: To manage operational activities and hold revenue assets.

   • A Trust Structure: To manage capital assets, which can be licensed to the trading company.
     

Conclusion

Establishing the right business structure is a critical step in your entrepreneurial journey. By understanding your options and aligning them with your goals, you can set a solid foundation for success. Symmetry Accounting & Tax specialises in structuring and business advisory so If you have any questions or need personalized guidance, don't hesitate to reach out!