Have you started business as a sole trader or partnership? Have you considered the risks of these structures?
The structure used to conduct business is important for any business owner to consider when embarking on a new venture. Although starting a business as a sole trader keeps costs low and taxes simple, there are risks involved.
The main risks include:
- being personally liable for any business debts,
- no separation of business and personal assets,
- no potential to split income or retain profits tax efficiently, and
- potential higher costs down the track when restructuring or selling the business.
Ideally an appropriate structure is setup at the outset, along with a plan to restructure in the future in the event of exponential growth or a business sale.
However, if a structure has not been put in place at the outset of commencing a business venture, it’s not the end of the world. There are options to restructure your business interests without paying tax. Three options are outlined below.
Rollover transaction
This is undertaken by transferring assets into a structure without any change in economic ownership of the business.
Example: George runs a successful photography business as a sole trader. The business has grown and now employs 5 staff. George decides to incorporate a new company and transfer the whole business into the company for shares in that company, and nothing else.
His business goodwill is now protected in the company and there is separation between his business and personal assets.
Provided all the conditions are met, this can be a simple way to transfer a business into a company without paying income tax. Other taxes such as stamp duty and GST will need to be considered, but exemptions are generally available in most cases.
Similar rollovers can also occur when transferring a business from a partnership to a company.
Business sale
It may be desirable to undertake a full business sale to a new structure, particularly where the business owner wants to change the ownership of the business (e.g., to bring in a partner, or investor).
Where a business satisfies the definition of a small business in the tax rules, concessions can be applied to reduce the tax payable to zero in most cases.
Example: Joy owns and operates a software start-up business. She wants to bring in a strategic partner to help the business scale, as it moves into a growth phase. Joy elects to sell the business to a new company for its current market value, which is $500k.
Joy satisfies the conditions and reduces the capital gain using the small business concessions. She chooses to rollover the remaining capital gain, which she can choose to reinvest in the business within 2 years.
There may be a cash cost from using this method. The business owner can either opt to contribute part of the business value into a superfund or reinvest in an eligible small business. The business owner should consider all options under the small business concessions to determine which is best.
Asset sale
In other cases, business owners may only want to move certain key assets of the business into a structure for asset protection purposes.
This may occur where there is valuable capital equipment or intellectual property that can be transferred independently of the trading business.
Example: Bob is a sole trader who owns a concreting company. He has multiple trucks and expensive machinery which he wants to move into a structure for asset protection purposes.
Bob can use the rollover rules to transfer those assets into “Asset Holding Co”. He then continues the trading operations as per usual, whilst leasing the equipment from Asset Holding Co for a commercial rate.
A business owner could utilise either rollover rules or the small business concessions to transfer these assets to other structures. This can be an effective third option where transferring the trading business would cause commercial disruption.
When should I consider restructuring?
If you are a business owner operating as a sole trader or partnership, there will be a tipping point when a restructure may be appropriate. It may be where you start scaling the business, employing staff, take on more commercial risks or make profit that puts you over the 25-30% flat corporate tax rate.
If you have not yet commenced a business venture, considering whether a structure is desirable at the outset will save potential restructure costs in the future.
Either way, getting timely advice can only enhance the value of your business and improve your family balance sheet.
Speak with Jonathon Wilkes from Solve Accounting on 0419 777 684 or at jonathon@solveaccounting.com.au to find out more.