12 things that can go wrong when selecting a business structure

June 25, 2020 12 things that can go wrong when selecting a business structure

When selecting a business structure for a small business, there is a cheap way and an expensive way.

The cheap way is to do it right first time – by getting advice from an experienced professional. But the expensive way is commonly disguised as the ‘low-cost’ method.

Make sure you consider the real costs of setting a business up – selecting the wrong structure through poor advice can become a costly mistake.

The ‘low-cost’ (expensive!) way to structure a small business

When you try to cut corners with your business structure by choosing the ’low-cost’ method, it can actually get very expensive.

Any or all of the following 12 things could potentially happen if you don’t do your homework first:

1. You choose the wrong structure;

2. You infringe on someone else’s trademark;

3. The “off the shelf trust” you set up didn’t allow you to exclude your ex-partner and their children from another marriage; so they are possible beneficiaries of your new business profits;

4. You went into a ‘partnership’ with a mate and chose a structure that exposes you to liability for his (many) mistakes and liabilities – this was overlooked with the excitement of starting a new business;

5. You didn’t consider how profits are taxed in your chosen structure;

6. You didn’t give any thought to how capital profits are taxed when you sell the business;

7. You plan to grow and seek outside investment but chose a structure that makes this difficult;

8. The structure you chose makes you ineligible for the government grant you were relying on to kick-start your growth;

9. You didn’t register correctly with the taxation authorities and receive a large fine for getting it wrong;

10. Your customers are slow to pay, and you registered for GST using the accruals method instead of the cash method;

11. You didn’t agree on the terms of a shareholder’s agreement before you started and now you have a dispute with your business partner;

12. You chose to use the same structure for running your business as you used to make previous investments. Now you are being sued and your non-business assets are at risk.

Selecting a business structure that’s problem-free

The above problems can all be avoided with a little due diligence before selecting a business structure for your small business.

It is important to consider the advantages and disadvantages of the various structures available. Which one best suits your circumstances?

Remember that the structure you adopt now should also accommodate your plans for the future.

Changing a business structure after it’s set up

Have you set up your small business with a structure that’s causing you problems?

The good news is you are not locked into it forever. You have the option to change the structure as your business grows or changes.

However, changing a structure will incur costs like stamp duty, creating a taxable capital profits event, as well as additional set up and advice costs. In most cases, these will add up to much more than what you thought you were saving by taking the ‘low-cost’ option.

Clearly, it’s best to get it right first time when selecting a business structure. Start by downloading our Business Structures eBook.

Don’t be tempted to cut corners. Whatever type of business you are setting up, always seek advice from a solicitor or accountant to help you decide on the most suitable structure. Contact us to discuss your business needs.