Structuring for Businesses

The entities you use in your structure will play a critical role in how you are taxed, and how much you are taxed.

A sole trader will be taxed at whatever their marginal tax rates are. They also have to contend with specific business loss rules. Together with wealth protection reasons, we seldom recommend a sole trader structure.

The partners of a partnership will also be taxed at their marginal tax rates. There is some limited flexibility to save tax, such as using uneven partner salaries. For many situations, it is advisable to avoid a partnership structure.

A company will be taxed at its relevant flat tax rate, which is typically less than the individual tax rates. However, when the company pays a dividend, this may lead to “top-up” tax.

Your earlier choices around structuring may alleviate or mitigate the top-up tax; such as whether the shareholders are individuals or a family trust. For this reason, plus other criteria, we usually recommend a company with family trust shareholders.

Throughout Australia, family trusts are a very popular vehicle for tax purposes. They don’t pay tax, but rather the beneficiaries do. The structure provides fantastic flexibility for mitigating taxes year after year. So, when we’re advising a family business, a family trust will almost always be involved.

Other trust options include unit trusts and hybrid trusts. These are typically used when you want benefits of a trust structure but have business owners from different families.

Within the conversation of saving tax using structures, a self-managed superannuation fund (SMSF) may be considered. For instance, the business premises might be owned by a self-managed superfund.

Since businesses come in all different shapes and sizes, family and non-family members, small or big business aspirations, there isn’t a one-size fits all solution.

That doesn’t mean that structuring has to be hard. In fact, it’s often a simple process. But, it’s vital to get right from the beginning, and revisit it from time to time to ensure it remains tax-effective as the business grows.

If you’re unsure about the tax effectiveness of your structure, please reach out to us, as we’d love to help.

What typically happens over time, is that as your business grows, you hire new people, create new positions and tweak your management team as-needed in the moment.

This works reasonably well when you are a small business, with the team being highly connected and quite a number of the team being a jack of all trades.

However, there comes a time when what worked as a small business no longer works [best]. This is when restructuring should be considered.

Scientific research shows that one of the key pillars for “Winner” success in business is to have a Fast Decision Structure.

The structure needs to simultaneously support the reduction of bureaucracy, creation of a winning strategy and a high performance culture.

People need to be in positions where they thrive, know their responsibilities, have authority and are held accountable.

The management team needs to focus on setting a strategy and executing it with precision.

You must excel at sharing vital information across the organisation, breaking through silos and cooperating on execution.

Interestingly, the science also reveals you should put your best people closest to the action (in other words, closest to paying customers) – keeping frontline stars in place.

Getting from where you are now to a Fast Decision Structure is never about changing a few titles and/or people. It involves going deeper. Looking into the functions that your business needs to perform to excel at its strategy; and then crafting precise roles, authorities, reporting lines and strategic leadership system.

If you’d like to discuss a method to achieve this, please let us know.

In that video you just watched, we mentioned some research.

If you’d like the references, simply head on in to the Munro’s Business Academy and you can find them on the Reference page.

It’s really wonderful to see a successful business, or a group of successful businesses and investments, built-up by grandparents and parents, passed down to their children.

What’s horrible to see is that family wealth eroded over time, of which there can be many different causes. Such as, mishandling of tax, divorce, poor investment decisions, even embezzlement.

We know very well that planning for and executing wealth succession plays a critical role in mitigating the erosion of family wealth.

Things which may come up in the succession planning stage are:

• Do you need blood-line clauses or binding financial agreements?
• Have all historical, and planned future, loans and gifts been properly documented?
• For family members working in the business, what is their fair market remuneration?
• Do you need an external Financial Controller?
• How often should the financials be audited?
• Do you need specially-designed trustee and/or appointer companies?
• Do you need a family constitution?
• What dispute resolution mechanisms do you need in-place?
• Do you need a family board and what external advisors will help enhance future performance?

There are also the matters of estate planning, to help achieve a smooth, asset preserving transition following the death of a loved one.

All of this can be quite daunting, and unfortunately we know all too well that people can choose to put this into the too hard basket. Sometimes until it’s too late. It’s not a situation any family wants to be in.

If you’re affairs aren’t in order, or you’re not sure if they are appropriately optimised, then give us a call. We’re here to help.