Few businesses stay at their start-up size. As they grow and mature, all kinds of changes take place. From the size of your team to the amount of workspace you lease, business owners must make continuous adjustments as they grow and scale. Yet among all of this change, one thing often stays the same, which can be to the detriment of your business: structure.
Many businesses start as sole traders or partnerships, as these formats work well for fledgeling businesses. But even some corporate-style arrangements can cease to serve the needs of organisations over time as you grow.
Let’s start by looking at five signs you may have outgrown your initial business structure.
Five signs you’ve outgrown your business structure
Your legal structure could be strained at the seams if you see these signs.
1. You’ve added employees
Once your business has added employees, you’re not only responsible for your personal actions, but also for the actions of your employees. Therefore, you’ll probably want added liability protection.
Changing your structure to a company or trust provides some legal protection against lawsuits. It essentially puts a degree of separation between your personal assets and your business.
2. You’ve taken a hit on your personal taxes
Most people starting in business operate as a sole trader. As a sole trader, you’ll pay tax on your earnings at your individual tax rate. Once earning above $45,000 you'll be paying tax at 32.5% plus 2% Medicare levy. Companies carrying on business will only pay tax at 25% in the 2021-22 financial year.
People starting out tend to choose the sole trader option due to convenience and cost but once their revenue ramps up, a company structure appears more favourable and efficient. A tax expert can help you decide when it is the most advantageous time to make the switch.
3. You’ve brought on a co-owner or partner
After a successful start, many business owners bring on another owner. This is a smart move for various reasons. Perhaps you have immense technical expertise but lack industry connections. Another owner who excels where you struggle could bring tremendous strength. Maybe you’re starting to look toward retirement and want to turn the business over gradually to a younger person, even a family member.
Whatever the reason, you’ll need to rearrange your business’s legal structure when you bring on a partner.
4. You’re ready to issue shares to investors
An infusion of capital can give your business the resources it needs to expand into new markets, hire top talent or purchase much-needed equipment or property. But if you’re operating as a sole trader or partnership, you’ll first need to restructure.
Selling shares of stock in your company comes with trade-offs. You must give away more shareholder voting rights, leading to less control over critical decisions. On the other hand, this strategy may lead to a healthier foundation and dramatic growth.
5. You’re working on your business succession plan
Whether you’re getting ready to retire or want to sell your business to have more time to focus on other opportunities, a change in structure may help you accomplish your goals.
As a sole trader, you’re at a disadvantage when it comes to exiting a profitable business. You can’t transfer or give part of the ownership to anyone else. Also, if you pass away while you’re a sole trader, the business essentially dies with you. Your estate inherits all of the business assets.
By changing your legal structure, you broaden your succession possibilities.
How to make the change
If any of the above situations sound familiar, the time might be right for a business structure upgrade. But where do you start? And how do you know which direction to go?
First, get to know the different types of legal structures available to you:
- Sole trader: the simplest business structure, putting you in complete control.
- Company: more complex, limiting your liability since it’s a separate entity.
- Partnership: consisting of two or more people who distribute income or losses.
- Trust: in which a trustee bears responsibility for business operations.
Discuss these options with your business advisor, including tax and legal implications. Keep in mind that your structure determines:
- Licencing requirements
- Taxation
- Your status as a business owner or employee
- Your potential personal liability
- The amount of control you have over your business
- Ongoing costs and required paperwork.
You’re free to change your business structure throughout its lifespan. As you consider your options, it’s helpful to remember that you’re not stuck with your choice forever. Keep a structure as long as it suits your purposes.
We're here to help
Ulton can help you consider all the implications mentioned above as you weigh your options. Get in touch with us to move forward with your restructuring - we can help through each step in the process!
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