When setting up an ecommerce business you’re likely starting out small — quite possibly just by yourself. So you might not be thinking about the long-term business structure or tax implications. But setting up these foundations correctly from the start is critical to ensuring your business’ long-term success.
In this article, we'll look at five strategies you can employ to set your business up with the best chance of success.
Liston Newton Advisory is here to help you get your business set up correctly, right from the start. Contact our expert financial advisers to book in for your free strategy session, and see how we can help you get the most out of your growing ecommerce business.
Determining the right structure for your ecommerce business
When getting your ecommerce business up and running, you’re at the start of your business journey. You may not necessarily be thinking about the most effective business structure. The best ways to set up your business in order to minimise tax might not have crossed your mind.
But jumping into a business structure without advice comes with big risks. You’re not considering the short-term and long-term impacts, nor are you planning for the growth that you likely want to see.
However, there’s good news for those running an established ecommerce business that haven’t given their structure much thought. There are government provisions available that can apply to your situation, which allow you to change your structure without any major tax impacts.
[feature_link]There are many reasons why you might want to change your structure. Your business might be growing, or your may be considering taking on a partner. It might even be to improve the level of asset protection you receive. Read our article on how to change your business structure.[/feature_link]
Tax minimisation strategies for ecommerce business
Once you’re comfortable with the business structure you’ve chosen, it’s time to start looking to the future.
Forward planning is important for any business. And for ecommerce businesses, you’re actually in a better place than most. With all your incomings and outgoings, and the data you’ve gathered, you’re able to forecast your income and expenses with a reasonable degree of accuracy.
Forward planning also means taking your tax into account. As profits within the ecommerce industry can be quite high, this also means your tax can be as well. Luckily, there are some ecommerce tax minimisation strategies that you can employ to help reduce your tax bill, both now and for the future.
Short term tax minimisation strategies
- Contribute more money to your super. You can make up to $25,000 in before-tax super contributions, which are taxed at a rate of 15%. As a sole trader, these can be considered as tax deductions. You can also claim them as an employee.
- Bring forward your expenses. If you can pay things like business rent, bills, and stock payments in this financial year, you can claim them as a tax deduction now.
- Distribute your income more effectively. If your business is structured as a family trust, you control how your income is distributed. So you can increase or decrease the income you receive, depending on what your tax situation is looking like.
- Take advantage of the government’s instant asset write-off scheme. This allows you to instantly write-off the expense of any large capital purchase from your assessable income before the financial year has even ended.
Long term tax minimisation strategies
- Review or restructure your business.
- Review your personal asset structures. There may be more tax-effective structures that can hold your investments.
- Invest to minimise your tax. Methods such as taking advantage of negative gearing in an investment property, or investing in a company to take advantage of Early Stage Investment Company (ESIC) concessions.
- If you operate a trust, review your beneficiaries. This ensures that each beneficiary is getting the correct amount for their tax situation, and no income within the trust goes to waste.
- Review your income protection. Income protection gives you support should you no longer be able to receive income. It’s also tax deductible — but only when separate to your super. So consider going with a third party for your income protection, if you’re not already.
Understanding how to increase your profits
Driving your profits comes down to a business tool known as the Four Profit Levers.
Think of it like this: you’ve got four levers that control your business. When pulled, each one will make a significant change to your business, and in turn impact your profit margin in a different way. Understanding this tool can help you forecast the impact of the different changes you make to your business, and therefore understand which levers you need to pull when.
The four levers are:
- Sales volume
- Product price
- Operating costs
- Direct costs
The first two levers, sales volume and product price, impact on your sales and direct income. The remaining two — operating costs and direct costs — relate to the costs associated with running your business.
‘Pulling’ on any one of these levers, whether it’s a 10% increase to your prices, or reducing your direct costs by 15%, will change your business’ profitability. So it’s a matter of running the numbers, and forecasting which changes are going to deliver the best results for your business.
Planning your ecommerce exit strategy
There may come a point in the life of your business when it’s looking like the right time to leave. It might be a business sale, a new opportunity, or even bailing out because the road ahead looks rocky.
Whatever your reason, when selling an ecommerce business it’s crucial to start this process as far ahead in time as possible.
For the seller
As the seller, planning ahead can allow you to access generous capital gains tax concessions, which reduce the amount of capital gains tax you pay on its sale. And as you’re selling a business, this can be a lot of tax. When structured and planned correctly, you may even be able to reduce your capital gain taxable income to $0.
For the buyer
But you also need to give the buyer enough time to make sure your business is an attractive purchase option. They’re going to want to see that:
- You have all the necessary financial and tax records that demonstrate the profitability of your business;
- Your brand is solid, with no legal or ethical issues clouding the sale;
- Your suppliers are willing to transition to a new owner—you’re not taking them with you;
- There’s a solid transition plan in place, which ensures a smooth, seamless transition to the new owner;
- Your business’ backend is thoroughly documented, and ready to hand over;
- You have a comprehensive CRM in place that monitors all the necessary business data they need to continue its growth;
- Your website is updated and is doing its job — you’re an ecommerce business, after all; and
- You have a clear growth plan that you’re following that’s driving your traffic.
Planning all these elements in advance ensures that your business is ready, and as attractive as possible, for a new buyer, when it comes time to sell.
Successfully selling an ecommerce business
When it does come time to sell your ecommerce business, there’s a lot to think about. We’ve broken it down into the following steps:
- Make the decision to sell.
- Get advice from your accountant to ensure your business is structure correctly, and will enable you to access available CGT concessions.
- Get an appraisal or valuation of the business.
- Engage a business sale specialist to create a prospectus, so you can present your business in the best light possible.
- Work with a specialist to locate potential buyers.
- The specialist can also help you negotiate price and terms with your buyers.
- Do your due diligence. The buyer will undertake their due diligence, such as checking your sales figures, and you should ensure you check their credibility and financial capacity.
- Formalise the sale and complete the business handover.
While it looks simple enough broken down into these steps, executing your ecommerce business exit strategy can be a lengthy process. So make sure you get the right advice and support when selling your business.
The final word
At this point, you should have a basic understanding of what’s necessary to correctly set up, run, and grow your ecommerce business. You should also understand that there are ways to exit your ecommerce business with grace, dignity, and at the sale price you want to see.
But while it can seem like a breeze at the start, maintaining an ecommerce business can be a lot of work, particularly on the financial and tax management side. So to give your business the best chance of success, we recommend getting the right advice, right from the start.