How to Structure Your Business for Exit
When starting, buying, or changing the structure your business trades under it requires careful planning and help from professional business advisers.
So please note:
I’m definitely not an accountant or a professional business adviser so I need to be clear that, you, the reader of this post assume all responsibility if you use this information and we (Anthony Manly & SelfManagedBusiness) assume no responsibility or liability whatsoever on your behalf.
Phew, now that we have that out of the way let’s understand how to make sure that your business is on a very solid footing so that it can
be around for a long time. You want to create something that is indestructible so what are we talking about here?
Firstly let’s start with the dreaded “TAXES”.
It’s really important to see an accountant so that you get the right entity to trade under because at some point, you might want to sell the business and in every country around the world there are different regulations but certainly in my country, when you go to sell your business, you have tax implications
You might even want to decide to put your business in a different country. I’d like to point here that I’m not an expert on this and certainly can’t give you advice on this however your accountant can.
Tip: Seek expert advice on tax in the early stages of business because when it comes to tax if the taxation
office (ATO as it’s known here in Australia) feels that you might have restructured things in an effort to pay less tax, for example, they might want to look at when you chose to do this and they may treat your company differently.
COMMON LEGAL ENTITIES USED FOR BUSINESS
One of the key decisions you’ll make when starting a business is its structure. Your choice of structure will depend on the size and type of business and how you want to run it. There are a number of structures that you can choose from when starting or expanding your business.
The 4 most common types of business structures in Australia are:
Consider each option carefully, as there are key factors and rules to consider for each structure.
Your business structure can determine:
- the licenses you require
- how much tax you pay
- whether you’re considered an employee, or the owner of the business
- your potential personal liability
- how much control you have over the business
- ongoing costs and volume of paperwork for your business
You can change your business structure throughout the life of your business. As your business grows and expands, you may decide to move to a different type of business structure.
Tip: You should seek advice from a professional business adviser, lawyer or accountant to help you with the right entity so that you have some sort of protection.
A sole trader is the simplest form of business structure and is relatively easy and inexpensive to set up.
As a sole trader, you are legally responsible for all aspects of your business including any debts and losses and day-to-day business decisions.
Tip: Operating as a sole trader, here in Australia, is not the smartest approach because you have maximum exposure. So, you should seek advice from a professional business adviser, lawyer, or accountant to help you with the right entity so that you have some sort of protection.
A partnership is a business structure made up of 2 or more people who distribute income or losses between themselves.
There are 3 main types of partnerships:
General partnership (GP) – is where all partners are equally responsible for the management of the business, and each has unlimited liability for the debts and obligations it may incur.
Limited partnership (LP) – is made up of general partners whose liability is limited to the amount of money they have contributed to the partnership. Limited partners are usually passive investors who don’t play any role in the day-to-day management of the business.
Incorporated Limited Partnership (ILP) – is where partners in an ILP can have limited liability for the debts of the business. However, under an ILP there must be at least one general partner with unlimited liability. If the business cannot meet its obligations, the general partner (or partners) becomes personally liable for the shortfall.
A company business structure is a separate legal entity, unlike a sole trader or a partnership structure. This means the company has the same rights as a natural person and can incur debt, sue, and be sued.
As a member, you’re not liable (in your capacity as a member) for the company’s debts. Your only financial obligation is to pay the company any amount unpaid on your shares if you are called on to do so.
A trust is an obligation imposed on a person (a trustee) to hold property or assets (such as business assets) for the benefit of others, known as beneficiaries.
You must get insurance because things happen. You could have a technology meltdown, face a disaster, could have a client’s work go horribly wrong.
To protect you from these types of things from occurring is to have an insurance policy. Definitely engage with an Insurance Broker on this so they can consider your specific needs in the policy wordings. Not all insurance policies are the same.
Also, ensure you are not single-point sensitive anywhere in the business.
You need to reduce the risk in your business so there is not key person, one technology, or single thing you’re dependent on so look to have two of everything
- two computers
- two internet connections (separate providers)
- two people that can do every job in your team
You get the idea. That way, if something happens, you have a backup.
BUY A BUSINESS
You could buy a business and get a fast start and accelerate your growth by buying databases, for example.
If you look at the larger businesses in your space, they do this exact strategy by merging and acquiring competitors so that they can grow the business bigger.
Perhaps you could go and buy up your smaller competitors and make a bigger company and this is a good business strategy if you’re in that position.
Lastly, make sure that your business is saleable. What would be the terms when you want to sell your business? Who’s name is it in?
Where’s the list of customers held? Where are the bank accounts?
If you know in advance that you want to sell your business, you should establish it from the get-go as something that you could actually sell.
So, if you follow the ideas laid out in this post, and you have the right tax structure, the right legal entity, you own the business outright then things are going to be alot easier for you when it comes to selling the business.
Action step: If you have an existing business or you’re starting a new business perhaps review some of the ideas outlined in this post and understand where you’re at with your business structure.
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