What is the most appropriate operating structure for your business?
The best time to get the structure right, is at the beginning. There may be substantial cost to unwind an inappropriate structure later. Transfer duty and capital gains tax may make restructuring too expensive, down the track.
Factors that need to be considered when determining the appropriate structure for your business, include the number and nature of participants, financing arrangements, whether capital is to be raised, the size of business, licensing and regulatory requirements, asset protection, distribution flexibility, access to capital gains tax exemptions and any planned exit strategy.
If you take advice early, you can plan ahead for how the ultimate structure will look and make sure that whatever you put in place to begin with, fits in with your long term plans. There is nothing wrong with taking and “Meccano set” approach, i.e. choose the right starting structure and then bolt on other desirable elements, when you can afford to do so.
Various business structures expose participants to varying levels of risk. Operating any business will expose you to risk, including:-
• failure of the business and exposure to claims by creditors;
• exposure to claims for accidents that are not fully insured ; and
• exposure arising from statutory liability (e.g. workplace health and safety or environmental legislation).
A good business structure will limit exposure to personal liability arising from business activities. The way you structure other business involvement and your personal affairs may also minimise your exposure if things go wrong.
Where there are 2 or more owners of the business
Where a business is operated by two or more families, an appropriate operating structure should be adopted to suit the personalities and circumstances involved. It is important that the owners of the business are aware of the liabilities they can inherit from the people they are in business with.
Each partner of a business is liable for business debts and liabilities incurred by each of their partners and their employees. As a Director, you can be liable for actions of your co-directors. As a Guarantor, you are liable for the entirety of the debts you guarantee, even if there are several guarantors.
If you are aware of liabilities you can inherit from the people that you are in business with and adopt the appropriate business structure, your own exposure can be minimised.
The best time to agree on the ground rules for operating a business and what happens if the owners have a falling out, is at the beginning when everyone is getting on well. A good co-ownership agreement will reduce the chances of dispute. It will provide an appropriate mechanism to resolve disputes that die arise, without destroying the business.
Many business owners would not be able to afford to buy out their co-owner should they or their co-owner die or become incapacitated for a lengthy period. Appropriate structuring of the agreement between the co-owners and facilitate payout of a deceased or incapacitated co-owner at a fair price and on terms that won’t be an unacceptable burden on the business.
Research has proven that businesses that plan for the future outperform those that don't. Let Conrad Law help you plan for the future of your business.