The business structure you chose when you first started might not be the best fit for where your business is today. As businesses grow and evolve, their needs change, and what made sense as a startup might be costing you money or limiting your options now.
Many Gold Coast business owners stick with their original structure simply because changing seems complicated or expensive.
However, the benefits of restructuring often far outweigh the costs, particularly when it comes to tax efficiency, asset protection, and planning for future growth.
Understanding the Different Business Structures
Each business structure available in Australia has different tax implications, compliance requirements, and legal protections. Understanding these differences is crucial for making informed decisions about your business.
Sole traders have the simplest structure with minimal compliance requirements, but all business income is taxed at personal tax rates, which can become expensive as income grows. There’s also no separation between personal and business assets, which can create risks.
Companies pay tax at the corporate rate, which is currently lower than the top personal tax rates. Companies also provide better asset protection and more flexibility for bringing in investors or selling the business. However, they require more compliance and administration.
Partnerships allow multiple people to own and operate a business together, with profits and losses shared among partners. Each partner pays tax on their share at their personal tax rates.
Trusts, particularly discretionary trusts, can provide tax flexibility by allowing income to be distributed to beneficiaries in lower tax brackets. They also offer some asset protection benefits and can be useful for estate planning.
Tax Efficiency Considerations
One of the main reasons businesses consider restructuring is to improve their tax position. If your business is consistently profitable and you’re paying high personal tax rates as a sole trader, moving to a company structure could provide significant savings.
Companies can also retain profits within the business at the corporate tax rate, rather than having all profits flow through to your personal tax return. This can be particularly beneficial if you don’t need to withdraw all the profits for personal use.
Discretionary trusts offer flexibility in distributing income among family members, potentially keeping more money in lower tax brackets. However, trusts come with their own complexity and compliance requirements.
The key is understanding how much tax you’re currently paying and what you could save with a different structure. Professional analysis of your specific situation is essential because the best choice depends on your income level, family circumstances, and business goals.
Asset Protection Benefits
As your business grows and accumulates assets, protecting those assets becomes increasingly important. Different business structures offer different levels of protection against potential creditors or legal claims.
Operating as a sole trader means your personal assets are at risk if your business faces financial difficulties or legal action. Your family home, personal savings, and other assets could potentially be claimed by business creditors.
Companies provide a separation between business and personal assets. In most cases, if the company faces financial difficulties, your personal assets remain protected. However, directors can still face personal liability in certain circumstances, particularly if they’ve provided personal guarantees.
Trusts can offer additional asset protection benefits, particularly when combined with appropriate insurance and legal structures. However, the level of protection depends on how the trust is structured and operated.
Planning for Growth and Investment
Your business structure also affects your options for future growth. If you’re planning to bring in investors, sell part of the business, or expand significantly, some structures make these activities much easier than others.
Companies are generally the most flexible structure for bringing in investors or selling shares in the business. The company structure is familiar to most investors and lenders, making it easier to raise capital when needed.
If you’re planning to expand into multiple business activities or locations, a company structure often provides better flexibility for managing these complexities. You can have multiple companies under a holding company structure, or use trusts to manage different activities separately.
Compliance and Administration Costs
Different business structures have different compliance requirements and ongoing costs. These need to be weighed against the potential benefits when considering restructuring.
Sole traders have minimal compliance requirements beyond basic tax returns and GST obligations if applicable. However, they miss out on many of the benefits available to other structures.
Companies require annual tax returns, ASIC annual statements, and more detailed record-keeping. They may also need annual audits depending on their size and circumstances. These requirements create ongoing costs but also provide better financial transparency and credibility with lenders and suppliers.
Trusts require annual tax returns and careful management of distributions and beneficiary entitlements. The trustee has significant obligations and responsibilities that must be managed properly.
Timing Your Restructure
The timing of a business restructure can be crucial for both tax and commercial reasons. Restructuring at the wrong time could trigger unnecessary tax liabilities or disrupt important business relationships.
Capital gains tax implications need to be carefully considered. Transferring assets from one structure to another often constitutes a disposal for tax purposes, potentially triggering capital gains tax on any increase in value.
However, there are various rollover provisions and concessions available that can help minimise or defer these tax consequences. Small business CGT concessions might apply, or restructure rollovers might be available depending on your circumstances.
The commercial timing is also important. Major restructures are best done during quieter periods rather than in the middle of busy seasons or when you’re trying to secure important contracts or financing.
Common Restructuring Scenarios
Successful sole traders often consider moving to a company structure once their income consistently exceeds certain thresholds. This can provide immediate tax savings and better long-term flexibility.
Family businesses might consider discretionary trust structures to involve family members and distribute income more tax-effectively. This can be particularly beneficial when family members are in different tax brackets.
Businesses planning for sale or succession might restructure to make the transaction simpler and more tax-effective. Having the right structure in place before you need it makes the eventual sale much smoother.
Property-holding businesses often benefit from specific structures that provide better tax treatment for rental income and capital gains, while also protecting valuable assets.
Business restructuring involves complex tax and legal considerations that require professional advice. The wrong structure or poor implementation can create expensive problems that are difficult to fix later.
At de Zwaans, we regularly help Gold Coast businesses assess their current structure and consider restructuring options. We work closely with clients to understand their specific circumstances, goals, and concerns before recommending any changes.
Contact de Zwaans today to discuss whether your current structure is still serving you well, and explore the options available for improving your tax position and protecting your business assets.