5 Common Business Structure Mistakes

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Assessing business structures
Business Structures
June 28, 2019
minute read

We outline common business structure mistakes, and how to avoid them

When starting your own business, one crucial thing to consider is the business' structure. How you structure your business at the outset can have impacts in the future—and not always positive ones.

Many new business owners jump quickly into a particular structure without considering both the short- and long-term effects, a move which carries lots of potential risk. You might think that because you’re starting a business, then a company structure is the right way to go, and don’t give consideration to other options.

But a company structure isn’t always the best option. Operating as sole trader might suit your needs, or a trust structure might be a better option for a business owner looking to grow their wealth.

You need to consider all options available to you, otherwise you can find yourself in a restrictive structure that increases your liability and costs you more in extra tax.

Getting your business structure right at the start saves you untold misery and dollars down the track. Here are five common business structure mistakes people make when starting a business, and how to avoid them.

1. Structuring your business for the short term

It sounds obvious, but when starting out as a new business it’s imperative to consider the future of your business.

Jumping into the wrong structure and not considering the future, such as the potential for investors or new owners, is one of the most common business structure mistakes, and can mean that your business may need to be restructured. This is very expensive, as there are legal fees and capital tax gain implications, not to mention the stress it puts on you.

You need to plan for growth. For example, it might just be you now, but what if your business starts to grow beyond your means?

Do you see yourself taking on partners? If so, how do you plan to get paid from the business? Are you likely to sell your business share to another company member? What’s your exit strategy?

Every business plans to grow, so make sure you’ve planned your structure for the correct growth path. Speaking to an expert can help you get it right.

2. Ignoring your personal structure

Getting your business structure right is important, but failing to consider your personal structure and how it relates to your business is another of the key business structure mistakes a lot of people make.

For example, many business owners rush into setting up a company structure and place shares in their own name, or in the names of the business owners. After all, it seems like the easiest option.

Putting the shares of your company structure in your name doesn’t allow for flexibility or tax planning, and means if your business gets sold in the future all the capital gain would be distributed to each business owner and be taxed at high rates.

As a business owner—and a potential director of a trading business—you should look to protect your personal assets by removing as many as possible from your personal name, and look at holding those assets under your spouse’s name, or within a separate entity such as a family trust.

Choosing the right business structure lets you keep your personal and business affairs separate, enabling you to maximise your tax effective planning, and minimises any potential personal risk should the business get in trouble.

It’s essential to seek good advice around both your personal and business structure, so you can get it set up correctly, and acquire insurance tailored to your particular situation.

3. No agreement when multiple owners are involved

business structure

One of the big business structure mistakes people make is not considering multiple owners. When multiple owners are involved, it’s imperative to ensure there’s an agreement in place to determine how any future separation of ownership will be handled.

A shareholders or unit holders agreement ensures all owners know where they stand in the event that someone decides to part ways with the company in the future. It allows you to determine how the business gets valued in such a separation, and provides a clear and agreed upon set of rules and terms to follow should this occur.

Many business owners overlook this step which can result in difficult, messy situations. It’s not just money on the line—relationships too. Business structure mistakes like this can sour friendships, and damage lives.

So be sure to draw up a comprehensive shareholder agreement when you start your business, outlining the obligations and rights of each member, with clear exit planning for the case that things don’t work out.

4. Forgetting to do your research

Your business might be small now, but not doing your research into government-offered grants is one of the big business structure mistakes a lot of people make.

If you don’t know what’s available to you you’re missing out on some excellent opportunities. The Australian government currently offers a number of grants and tax offsets that are available to early-stage businesses—but only when set up under a company structure. So setting up your business under a family trust structure means you wouldn’t be entitled to access either the Research & Development Tax Incentive or the Early Stage Innovation incentives.

Also, if you’re thinking about bringing on investors in the future, you need to ensure it’s possible for investors to buy into your company without needing to restructure. Certain business structures (like companies) can receive tax incentives for investors, whereas a unit trust won’t.

So when starting your business, do your research into the grants and offsets available to each business structure, and then determine the right structure that will allow the right growth trajectory. Avoiding business structure mistakes like this one enables you to take advantage of tax offsets that are designed specifically to help businesses like yours grow.

5. Structuring your business yourself

structuring your business

Too often business owners attempt to save money by setting up the structure themselves instead of seeking professional advice.

Also, business owners who are unfamiliar with how to set up a structure will often overlook certain registrations and key compliance rules that their business falls under. Failing to take these registrations and rules into account can put you at odds with the ATO and ASIC, and even put your own intellectual property at risk.

Seeking professional advice is essential when starting or growing a business, and the upfront fees are more often than not compensated by short- and long-term tax savings—and the benefit of getting it right the first time.

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