Thinking of taking the plunge and starting up your own business? Or maybe, taking on some big investments? Want to lose the family home or pay twice as much tax as you need to? The structure you choose can have a massive impact on your tax liability, cashflow, asset protection and your general stress levels and well-being.
We’ll focus on business structure, but many of these principles translate to investment structuring.
So, what is a structure and why is it so important?
A structure is the vehicle you use to run your business or use for the legal owner of your investments.
Typical business structures include:
· Sole Trader;
· Discretionary Trust;
· Partnership; or
· Unit Trust;
Each have their own pros and cons and it is very, very rarely a one size fits all approach. Different structures are taxed differently, have different levels of access to capital gains tax reductions, have varying levels of asset protection and can impact your cashflow.
Things you need to consider when choosing a structure
In short, you should consider as much as possible. Many things can be a factor in the right structure for you, such as:
· What will the structure be used for?
· Who will operate the structure?
· The type of industry you are in
· The inherent risks associated with the business/industry
· Potential for growth
· Use of third party investors
· Expected income levels
· Your spouse’s income levels
· Ownership of the assets you currently own
· Potential for business partners
· Potential to sell the business
· Your future goals
· Assets acquired by the business
· The cost of maintaining the structure
· And many more….
Pitfalls of the wrong structure
The wrong structure can cost you money. Simple. You could be paying too much tax in the wrong structure. It could cost you your business but more importantly, it could cost you the hard-earned assets that you have accumulated over your life, including the family home.
It is important to set yourself up in the right structure from day one. A restructure down the track can be costly and may also be subject to capital gains tax. Imagine paying tax on a deemed increase in the value of your business?? No thanks. All because the right advice was not sought from the start.
I’m not a mechanic, so I wouldn’t try to change the engine in my car even if the bloke down the street told me it was all good and everyone else is doing it. You may know your job extremely well and that’s why you’re ready to start your own business, but knowing your industry and your job doesn’t make you a structuring wiz. Know your strengths and know when to get guidance.
Seek out help from people in your world that you trust and know what they’re talking about. Ask the right questions and get set up the structure that will serve you well for your priorities and needs.
Chat to your accountant about your structuring options and if you’re not 100% sure, get a second opinion. You should understand the structure you are in, what the benefits and limitations are and understand WHY it is right for you.
Protip: Old mate down the street who says, “Starting a business is easy, my father’s, brother’s, nephew’s, cousin’s former roommate told me all about this awesome structure and that’s why all us blokes use it.” WARNING: NOT A PROFESSIONAL.