Structuring Mistakes Business Owners Make
Written by Daniel Dubois
Choosing a business structure is one of the most important decisions a business owner will make. However, many people view structure as a one-off decision made when the business starts, rather than an ongoing strategic consideration.
The right structure can influence tax outcomes, asset protection, succession planning, financing arrangements, access to tax concessions and ultimately how easily a business can be transferred or sold. While some business owners start with the wrong structure, others fail to review their arrangements as profits grow, assets accumulate and family or commercial circumstances change.
With ongoing changes to tax legislation and increasing focus on integrity measures in recent Federal Budgets, maintaining flexibility has become more important than ever. A structure that works well today may not deliver the same benefits in the future.
Here are some of the common errors we encounter:
Choosing the Wrong Structure from the Start
Many business owners select a structure based on simplicity, cost or what worked for someone else. However, the most suitable structure depends on the specific goals and circumstances of the business owner.
Factors that should be considered include:
Expected profitability and growth
Asset protection requirements
Whether family members will be involved
Financing and funding requirements
Long-term wealth accumulation objectives
Succession planning considerations
Future sale or exit plans
Many businesses begin as sole traders or in relatively simple structures. While this may be appropriate initially, insufficient consideration of future objectives can result in costly restructuring as the business grows.
Focusing Only on Tax
Tax efficiency is often the primary driver of structuring decisions. While tax outcomes are important, they should not be the only consideration.
The strongest structures typically balance several objectives, including:
Asset protection
Succession planning
Estate planning
Flexibility to introduce new owners
Access to capital
Business sale opportunities
Compliance costs
A structure that delivers a positive tax outcome today may create significant difficulties when ownership changes or the business is eventually sold.
Mixing Business and Personal Assets
A common mistake is holding valuable business or investment assets personally while operating a business that exposes those assets to commercial risk.
Where possible, consideration should be given to separating trading activities from long-term wealth and investment assets. This can reduce exposure to business risks and provide greater flexibility as wealth accumulates.
As businesses become more successful, protecting accumulated wealth often becomes just as important as generating it.
Accumulating Assets in the Wrong Entity
Successful businesses frequently retain profits and acquire investments, commercial property or other substantial assets over time.
However, many business owners continue to accumulate these assets within their trading entities without considering the long-term implications. Holding significant passive assets inside trading entities can increase exposure to commercial risk and may affect future flexibility, succession planning and access to certain tax concessions.
A well-designed structure should consider not only how income is earned today but also where long-term wealth is accumulated.
Outgrowing Your Original Structure
A structure that suits a small business may become less effective as the business expands.
Warning signs that a structure review may be overdue include:
Profits have increased significantly
Additional staff have been employed
Family members have become involved
Multiple business activities are being undertaken
Commercial property has been acquired
Significant retained earnings have accumulated
New business partners or investors are being considered
Many business owners simply continue operating under the structure they established years ago without asking whether it remains appropriate for their current circumstances.
Choosing the Wrong Ownership Arrangement
Decisions regarding ownership can have consequences for decades.
Introducing family members, business partners or investors without carefully considering ownership and control can lead to future disputes, unintended tax outcomes and succession planning difficulties.
Ownership arrangements should balance:
Commercial objectives
Tax considerations
Asset protection
Family succession goals
Control of key decisions
Getting these arrangements right from the outset is far easier than attempting to unwind them later.
Failing to Plan for Succession and Exit
Many business owners devote years to building value without considering how ownership will ultimately transition.
Whether the objective is selling the business, bringing in investors, passing ownership to children or facilitating a management buyout, the business structure can significantly influence both the process and the tax outcome.
The ability to access small business CGT concessions, facilitate a share sale or transfer ownership efficiently is often determined by decisions made many years earlier.
The most successful succession plans begin when a business is established, or are at least contemplated well before retirement or sale becomes a reality.
Assuming Tax Laws Will Never Change
Tax legislation continues to evolve, and recent Federal Budgets have reinforced that governments regularly review concessions, integrity measures and the taxation of accumulated wealth.
Structures established purely to maximise current tax outcomes may become less effective if the legislative landscape changes in future years.
Rather than attempting to predict every future change, the objective should be to create sufficient flexibility to adapt as laws, family circumstances and commercial objectives evolve.
A flexible structure is often more valuable than a structure optimised for today's rules alone.
Treating Structure as a "Set and Forget" Decision
Perhaps the most common mistake is simply failing to review a structure.
Businesses evolve. Families change. Wealth accumulates. Tax laws change.
A structure that was appropriate five or ten years ago may no longer support the owner's objectives today.
Regular reviews can help identify opportunities to:
Improve tax efficiency
Enhance asset protection
Support business growth
Facilitate succession planning
Prepare for a future sale
Adapt to legislative change
When Was the Last Time You Reviewed Your Structure?
The most effective business structures are not simply those that work when a business starts. They are the structures that continue to support the changing needs of the business, its owners and future generations.
Whether you're establishing a new business, growing an existing enterprise or planning for succession, a periodic review can help ensure your structure remains aligned with your objectives.
Need a Second Opinion on Your Business Structure?
The Salt team can review your current arrangements and identify opportunities to improve tax efficiency, strengthen asset protection, enhance succession outcomes and provide greater flexibility for whatever comes next. Especially with changes to CGT and Trust rules, it’s important to ensure that your structure is appropriate for your future. Please reach out to book a discussion with your Salt advisor now, or get in touch if you would like to join us as a client.