When should you switch your business structure?

For successful businesses, the reality is that simple business structures do not work. They leave you risk exposed, are tax ineffective and are not efficient for succession or sale.

In the early stages of business life the philosophy often is to keep it simple and low cost. This may mean trading as a sole trader, in partnership or through a simple company structure.

If your business remains small, this can be entirely appropriate and may serve you well for the lifetime of the company.

However, if your expectations are greater than this, or if you can see that your business is likely to grow in a significant way, then you will need to change structure at some stage.

Successful fast growth businesses typically operate through a mix of company and trust structures. These structures are not for show nor are they just a money making scheme for accountants and lawyers! They create benefits such as separation and protection of assets, tax efficiencies, better risk management and flexibility.

The challenge for many people (and a question we are commonly asked) is “Is my business structure as good as it could be?”

The key thing to remember is that your structure should be appropriate and consistent with your expectations for the business – be they large or small.

If you have a very clear picture at the beginning, then getting your structure right can be an easier question to answer. For some businesses though, the reality is that you are not sure.

Even those of us who have a business plan in place and regularly update it (best practice), we are not always able to pre-empt growth and change in our business, industry and/or the economy in general. Just look at the recent world market changes and the impact that this is having here in New Zealand.

So what are the signs that it is time to make the change?

1. The first should be when you can identify that there is significant value building in your business. This may be reflected by the assets held in the business or the development of goodwill or intellectual property.

   The existence of these assets means that you should be considering risk protection and ways to protect against the unexpected. Ideally significant capital assets of the business (buildings, intellectual property etc) should be separated from the operating structure.

2. The second sign is the increased value of your personal assets. Once again, these assets should be protected against unforeseen business risks. The use of trusts can provide a clear separation of business and personal assets.
3. The third sign is where you can see a material increase in your tax exposure. As your business grows, so too should your profits and your earnings from the business. In many cases profits and cash will not mirror each other.

   Typically cash lags profits, so you may be dealing with the tax on profits that are not readily available to you. Apart from the fact that you don’t want to pay any more tax than is necessary, the right structure can help to manage tax impacts and the timing differences between profits and cash.

4. Finally, if you are expecting to sell your business or to introduce other partners or shareholders then the right structure can make a huge difference.

   Change does come with a cost. However, a delay in making the change may only perpetuate this cost and in some cases, increase the cost. It is important to review your structure on a regular basis to determine whether or not it is still suitable for your circumstances. At Hayes Knight we can assist you with this review.

For further advice on how to structure your financial affairs please contact your Hayes Knight adviser or:

Amanda Billington
Manager – Business Services
T +64 9 414 5444
M +64 27 227 9574
E amanda.billington@hayesknight.co.nz