A business structure dictates the legal structure of a given organisation as recognised by the jurisdiction. Examples of such structures include partnerships, corporations, sole proprietorships, and limited liability companies. However, these structures are not a set-and-forget type of activity. Businesses evolve, and so will their structure—meaning that the business structure you started with a few years ago may no longer be applicable to what you do today!
If you are reading this article, then it is safe to bet that you are wondering if your business structure is still the right structure for your needs. You are not alone in wondering this; many other companies also constantly wonder if they are using the right structure or whether they should switch to one more suited to their pace.
Here are some examples where a business should have switched structure to help you understand if your business needs a change:
Business 1 Example
A business starts as a sole trader and starts growing rapidly in the next three years. Unfortunately, the accountant did not consider all the changes the business experienced, and as such, did not review or change the business structure! This led to a substantial amount of income tax cost that resulted in additional liability for PAYG (pay as you go) instalments.
Although unsure about what is going on, the business owner believed that the tax cost was just too high. While consulting with the current accountant did not lead to any solution, a second opinion was wanted, and so the owner set out to reach out to another accountant for a second opinion.
Does this sound like you? If so, your business is highly likely to need a structural change. The above example is something many businesses actually experience in the real world. In many cases, you will need to re-establish your sole trader business as a company, paying a measly fee compared to the income tax saved from the change.
Business 2 Example
A business initially failed in its early endeavours, thus forcing its owner to set up a brand-new company and purchase the investment property from the previous endeavour. The owner believed that they could start this new business, losing money in the first year to avoid paying tax on rent from the investment property. Meanwhile, their focus was to improve cash flow to grow the business and later start making money.
Unfortunately, they lost the eligibility to discounts on the capital gain, which would have allowed them to ignore half the capital gain on investment properties. This results in hundreds of thousands of taxes needed to be paid during disposal.
If this relates to you, then fear not. All you need to do here is to go back to your old business and use a trust to purchase your investment. This will allow you to still use general discounts on capital gains, allowing you to save a lot on tax costs.
What is the general tip here? It is simple, really. All you need to do is get good advice! Good advice is one that you can easily understand and see how it can apply to your business. It is one that allows you to understand exactly what you can expect from it, helping you form an image in your mind of where you can see your company in a few years. Get good advice from professional and reliable accountants, and they will help you figure out if you need to change your business structure!
New Wave Accounting is your group of local small business accountants in the Gold Coast offering end-to-end accounting and bookkeeping services to help businesses in the area grow. Work with us today and receive the help you need to steer your business to success! Get in touch with us today!