The information provided on this page is general in nature and intended only to provide an introduction to the topic. This information is not to be taken as legal advice. You should not act on any information provided here, without obtaining legal advice first.
Some things to consider about your business structure
What is the most appropriate operating structure for your business? Relevant factors will 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 for how the ultimate structure will look and make sure whatever you put in place to begin with fits in with your long term plans. Other elements can be implemented later. There may be substantial cost to unwind an inappropriate structure later.
Various business structures expose participants to varying levels of risk. Operating any business will exposes you to many risks, such as trading failure or exposure to claims that are not fully insured. 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.
The use of a company to operate the business is a simple way to minimise your personal exposure. Shareholders of a company are not exposed to claims against the company as a result of their shareholding. There are also benefits for that company to act as a trustee of a trust structure as mentioned below.
Personal asset protection
Directors are personally responsible for many actions of a company. Couples may choose to protect their assets by having one of them take the risk of being a director. Personal assets and investments can be held by the non-director. You can significantly limit personal liability from business activities by adopting an appropriate asset holding structure.
Trust structures and distribution flexibility
The use of a trust structure to hold your business or investments, will provide flexibility in distributing profits and capital gains. This will allow the separation of risk generating business activities from passive investment assets. Negatively geared investments can be funded from trust distributions to provide asset protection and tax advantages.
Bank’s requirements for approving finance may be affected by your business structure. Potential bank requirements should be considered. For example, banks will often require all:
- shareholders in a company;
- principal beneficiaries of a discretionary trust; or
- unit holders in a unit trust,
to provide personal guarantees. This may adversely affect asset protection strategies.
Partnership, Shareholders & Buy-sell Agreements
The best time to agree on the ground rules for operating a business, and what happens if there is a falling out, is at the beginning when everyone is getting on well. A good partnership or shareholders agreement will reduce the chances of dispute and provide an appropriate mechanism to resolve disputes when they arise, without destroying the business.
Many business owners would not be able to afford to buy out other owners, should they die or no longer be able to work in the business. Using insurance to fund the payout of a deceased or incapacitated owner, can ensure they or their family receive a fair price.
Research has proven that businesses that plan for the future outperform those that don’t. Where owners of the business agree on how the business should develop and grow, they are less likely to find themselves in dispute.
For example, some of the issues likely to be covered by a good shareholders agreement are listed below. Partnership agreements also deal with similar issues.
- Identify who the shareholders are and confirm their respective interests. Where funds provided by shareholders to set up the business, make clear the terms on which those funds were introduced and must be repaid.
- Outline the management structure, shareholder representation, voting rights and requirements for board meetings and reporting.
- Certain types of decisions should require unanimous approval to change the status quo. Restrictions will often be imposed to ensure shareholders and directors do not engage in inappropriate conduct.
- Shareholders may agree that the company should be restricted from dealing with shareholders and family members, except on an “arms-length” and commercial basis. The basis for remuneration of shareholders who work in the business, should be agreed on.
- “Divorce” provisions should be agreed on, that will apply where shareholders fall out. Buy-sell arrangements can be agreed to should a shareholder wish to retire from the business, or they die or are no longer be able to work in the business. Insurance funding can be incorporated into buy-sell arrangements, so that continuing shareholders don’t need to find funds to pay out a shareholder who dies. Buy-sell provisions should provide certainty about how to calculate what should be paid on exit.
- Dispute resolution procedures should be included to force shareholders to talk and try to resolve their differences, before resorting to litigation.
- Restraints of trade may prevent shareholders from leaving and getting paid out, and then setting up in opposition. Intellectual property rights and confidential information of the company and shareholders should be protected.
- The shareholders agreement can also provide a succession strategy, so that retiring shareholders have a ready buyer and are paid fair value for their shares, whilst bringing on “new blood” to run the business.
Disputes between shareholders and partners often destroy otherwise successful businesses. Usually, without a good shareholders or partnership agreement, the person in the strongest position wins. The business suffers whatever the result, as the owners of the business take their eyes off their game. If by chance fate does not deal you with the cards that put you in the strongest position, the money you saved by not sorting out an appropriate agreement at the start, will be dwarfed by your losses if a nasty dispute arises with the other owners of the business.