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. They create separation, tax efficiency, help to risk manage your business interests and allow for orderly transfer at the appropriate time.

The challenge is: when is the right time to put in place a more efficient structure? The answer is the earlier the better.

Change comes with a cost. You can be exposed to capital gains tax and stamp duty, and this can be expensive and a distraction from the main focus of your business growth.

If you have a very clear picture for your business and that it is going grow to a significant size, then there is a lot of merit in putting the basic structure in place at the beginning.

Equally, if your plan is to maintain a micro business, keep it simple and don’t be seduced by advice that over complicates what you need. Your structure should be appropriate and consistent with your expectations for the business – be they large or small.

If you have a 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.

You may start off small and the business clicks, with growth exceeding your expectations. Or, you may have hopes for something significant, but also know that it might not work.

If you’re in this situation, what are the signs that it is time to make the change?

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 should be separated from the operating structure.

The second 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. And in some 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.

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.

To maximise your access to tax concessions, and in particular the CGT small business concessions, you need to have your structure right in advance of any changes.

There are some ways to manage the tax costs associated with a change in structure. The first thing to do is to identify the structure that is right for your business. From there quantify the cost of any change and the best way to put it into effect.

You can read further advice on how to start with the right structure here, or read our guide to the different business structures you can utilise.

Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice.