We need to change the way we think about business structures.
Too often, business structures are treated as if they are built structures: A bridge is constructed once and aside from a little cosmetic maintenance here and there, the day one product tends to stay more or less the same for the next 50-odd years. It’s not reconstructed every time there’s a major change in vehicle design or an uptick in traffic volume.
This mentality might work for construction, but business structures aren’t meant to be cemented in the same way, literally or figuratively.
When you first establish a business, you build a structure that is fit for purpose at that point in time, taking into account its size, assets, ownership arrangements, embodied risks, and commercial objectives.
However, the variables that determined its initial set-up are exactly that—variable. Over time, the shape of a business and the environment it exists within, changes.
In the growth phase, businesses typically expand on headcount and assets, along with the overheads needed to support both. We see them make acquisitions, extend to new sites, and tap into new markets. And all the while that work is being done, life happens. Family structures and succession plans take on new shapes. The terrain shifts in the external environment too, as legislation reforms unfold across the business landscape.
All of this growth and change can mean that the structure that once fit so well 5-10 years ago is now under strain, dappled with weak points that expose you to risk.
Contrary to popular belief, an accountant’s role isn’t just to crunch the numbers. As much as we’re in the details, our big-picture focus is supporting our clients to build wealth, protect assets, and achieve their goals for the future. How your business is structured has a massive bearing on each of these areas, for better or worse.
Despite business owners’ best wishes, business structures don’t announce when they are no longer fit-for-purpose and require reconfiguring. And there is no one way an ill-fitting structure presents itself. Depending on how your circumstances have changed, the symptoms can show up in a whole number of ways, including but not limited to:
1. Your tax bill growing disproportionately with the business
Far and away, this is the symptom that most compels business owners to take action and review their structure. Unlike many of the other, quieter ways that an outgrown structure might present itself, like higher exposure of your personal and business assets, the rising tax bills hit business owners where they feel it hardest—in their back pockets.
Those that find themselves in this scenario are facing the challenge of having higher profits but not seeing that translate into greater financial returns.
To put this into perspective, let’s say that a trust worked well for a business when profits were modest, but now that the business has grown with profits alongside, it’s no longer as tax efficient as it once was. So despite the business performing better than ever, your structure is restricting the flow of return.
2. Realising that you’ve got too much at stake should something go wrong in the business
When growth is healthy and sustainable, it doesn’t happen overnight. It’s a gradual process. You start a business, you put your all into that business, and slowly but surely, you begin accumulating assets.
Because growth is incremental and asset accumulation is an inherently positive thing, it’s easy to fall into the trap of putting all your focus on building wealth, at the cost of protecting it.
We see this often in businesses that over time, have allowed cash reserves and other valuable assets to build up within their trading entities. The problem is that if you are holding business assets in your trading entity, those assets may be at risk if the business finds itself facing litigation, creditor action, or other claims. The higher the value of the assets, the higher the risk.
It’s a situation that tends to creep up on business owners. It doesn’t stare you in the face the same way that hiking tax bills do. It’s only when you take a step back and holistically assess the assets being held by the business, that you can understand what’s actually on the line if the business faced litigation.
3. Recognising that your personal assets are carrying more risk than you’re comfortable with
Sometimes, it’s not the business itself that has changed all that much, but your personal financial position, and with it, your appetite for risk.
In the early days of starting a business, people tend to feel comfortable throwing their all into it, operating with the mindset that when you’re starting with little, you’ve got little to lose (and everything to gain).
But as personal wealth builds, things start to change. And the idea of having your personal wealth on the line should anything go awry in the business is suddenly a lot less comfortable than it was ten years ago.
To put this into real terms, let’s say that a couple established a farming business through a partnership at a time when they had relatively few assets of their own. Years later, one of them receives a substantial inheritance.
In this scenario, the business and ownership arrangement hasn’t changed at all, but the value of personal assets that are now exposed through the structure has.
4. Knowing you want to pass the business on, but struggling to make the pieces fit
A tell-tale sign of an unsuitable business structure is when the structure itself is holding back your succession plans.
Let’s say you have a clear idea how you want the business to be passed on, but find that the way it’s currently structured doesn’t actually allow that vision to be seen out.
Passing a business down to one child may be relatively straightforward, assuming you own the business outright and there are no other ownership interests to account for. However, it becomes a lot less simple when there are four children on the scene, all of whom have different interests in different parts of the business.
In these cases, the answer may be to diversify across multiple, purposeful entities, creating clearer separation between the different legs of the business and a streamlined succession pathway for each child.
There’s an unconscious tendency to think that if your business structure stops working in the way it needs to, you’ll know about it.
But the reality is that there is almost never one big grand announcement. There are only symptoms—symptoms that present very differently for each business, because each business evolves differently.
For one owner, the smoking gun might be a taxation strategy that’s not as effective as it once was. For another, it might be uncomfortably high asset exposure that sends the alarm bells ringing.
This is why you cannot wait for the signs to present themselves.
That change might be:
In the business: An acquisition, a significant jump in turnover, location expansion, or a change in ownership.
In your personal life: A substantial inheritance, marriage or separation, birth of children or grandchildren, blending families or a change in your succession plans.
In the environment around you: New industry regulation or tax legislati
Each of these changes is a good reason to step back and review your structure as a whole.
That whole-picture view is something we build into the way we work with our clients. The way we do this is through a Statement of Assets and Liabilities (SOAL). It pulls together exactly what is happening across all your entities, and brings that onto the same page as your personal asset position and risk assessment, which covers areas such as insurance, estate matters, and debt.
It's a holistic document that passes through the hands of our business services, tax, business insights, wealth management teams. It maps your entire position and that is what makes it so valuable for reviewing your business structure.
Because if there’s one thing you take from this article, it’s that business structure does not exist in isolation. How your entities are structured in relation to one another have very real implications that can affect everything from your personal wealth position, to your succession and estate plans, to the options you have on the table for the business’s, and your family’s future.
If your business, wealth position, or family circumstances have changed in the last few years, now is the time to review whether your structure still supports your goals.
Don’t wait for a problem to arise. The earlier you review your position, the more options you’re likely to have available to you.