Company Structures

By Alexi Boyd |

Small Biz Matters – a half hour program each week where you can work ON your business rather than IN it.
Small Business Bookkeeping Tips
with Alexi Boyd from Boyd Office Management Services
Date: January 2015

 

Part 1: Sole trader moving into a company structure

Your business is growing and you want to limit tax & personal liability. There are generally two reasons why sole traders become a company:

  1. To limit the tax they pay (they’ve moved into the next tax threshold and are paying more than if they were paying company tax – which is 30%
  2. To limit their liability, they don’t want to be personally sued if something goes wrong.

So you’re considering changing your company structure to a P/L. You should consult your accountant to work out financially when is the best time to do this and to find out the process. However you should also consult a good legal team to make sure your company set up in the best way to improve your tax situation and limit your liability.

Ask your self the Question:

  1. How do I want to run my business?

Sole trader vs pty ltd – solves your liability problem but not your tax problem. OK if you want to keep the money in the business (reinvesting) but not if you want to remove it

  1. How to I want to own my shares?

Personally or through a trust fund – you can run a company through a trust, there are advantages & disadvantages

  • If the trust owns the shares there is a dividend split between you and the company
  • A trust structure means the tax liability is split (if your partner isn't earning as much money they pay the lower tax). You can also split the shares amongst other family members such as children.

THIS STRUCTURE – potentially the best option in terms of restructuring from a sole trader to a company.

  1. Holding company – holds the intellectual property & other assets
  2. Operating company – does the business with people – operational gets sued if any professional liability would be in that name
  3. Family trust – where the shares in your company sit

What are some of the complications that might arise? What are the advantages & disadvantages to this structure?

Personally or through a trust fund – you can run a company through a trust, there are advantages & disadvantages

  • Every company you need to have a BAS and annual tax return. Potentially that means greater admin costs - Holding / Operating / Trust
  • If you’re a director you have director duties – agenda, restrictions in your ability to trade if you’re insolvent for example.

Part 2: Partnership scenarios

When is a partnership scenario the best option?

  1. Bringing on a new partner into a business
  2. Setting up your business (founding dirctors)
  3. Offering shares to employees

Advantages:

  • Creates incentive for employees to stay long term & succeed

You need a good legal team who will, in this scenario:

  • Value the company to discover its true worth
  • Working out what to give % - different staff get a smaller pool of shares as opposed to the directors who get more
  • Work out contractual arrangements
    • Are the directors full time?
    • Are the shares in in addition to salary, (this is generally the case; they are paid under market value and shares are on top of that
  • Linking share allocation to KPIs
  • How do they get their shares over time
    • “vesting” over time for giving them their shares proportionately or
    • “clawback” (given up front but with the option to sell back if they are not meeting their contractual obligations.

 

(Photo courtesy of https://www.flickr.com/photos/photographingtravis/)