We are already a week into the new financial year and now is the perfect time to ask yourself, “Is it time to review my business structure?” The business structure you adopt now should also accommodate your plans for the future, however, you are not locked into that structure forever – you have the option to change the structure as your business grows or changes in the future.
Many business owners don’t realise that the business has outgrown its structure until something comes up – and this something is usually something negative. Often, this happens where not enough consideration has been given for what should have been the most appropriate structure.
Reviewing your business structure does not need to be a daunting task. We have highlighted some areas to think about to make the review stress free – these areas include:
1: Separate Risk From Assets
As a business owner you should keep the business risks totally separate from its investments and assets. You have risks whenever entering business relationships with customers, suppliers, creditors and employees. These risks are involved with running a business and in most cases the minimum business structure required will include a trading entity and a separate asset holding entity. We call this a ‘level one” structure. The asset holding entity should never have business ‘relationships’ – it should only invest or loan funds to related entity.
2: Choose a ‘Risk-Taker’ and an ‘Asset-Holder’
Within a family group, you should choose one individual to be a ‘Risk-Taker’ and another individual to be an ‘Asset-Holder’. The Risk-Taker should be the main person involved in your business and therefore should be the director of any trading companies (or trustee trading companies). The Asset-Holder on the other hand should not be, or act, or even be seen to be acting as a director of any trading companies. This is because the Asset-Holder should be “in control” of any asset holding entities (Including director, trustee and shareholder).
3: Separate Business Risks From Business Assets
Establish a business asset holding entity (separate from your personal asset holding entity) and transfer all intellectual property (IP), trademarks, patents, logos, business names, plant and equipment etc. to this new entity. Establishing a licence agreement will assist in separating business risks from business assets as this license agreement protects the use of all IP from the business asset holding entity to trading entity, and a service agreement / rental agreement to record the lease / rent of other business assets. The business asset holding entity should not have any other relationships with other parties except for the trading entity.
4: Different Businesses Should Operate From Separate Entities
To prevent the possible failure of one business venture affecting any other business ventures, different businesses (or divisions within a business) should operate from separate business entities. Think of business ventures like a submarine, if water leaks into a submarine the compartments can be locked off to prevent water getting into other compartments and sinking the submarine. In the same way if problems develop within a business (it fails, legal action is taken against it, etc), it should be kept separate from other successful business / divisions so that these can continue.
5: Regularly Move All Surplus Funds From The ‘Risk’ Side To The ‘Asset’ Side
Ensure that income from your trading entity does not remain in the entity as working capital. If your trading entity has legal action taken against it, then any cash assets are at risk. Instead, fully distribute the profits from your trading entity at least once each quarter, and to provide working capital lend them back by your asset holding trust using a secured loan agreement. Ensure that any trading entities have the minimum of assets (small amount of cash, debtors and stock only), and that no loans remain owing from individuals or related entities to the trading entity.
For help and assistance with your business structure, please call 9374 8400 to talk to one of our team members. Also follow us on social media to keep informed with blogs as they are posted, as well as giveaways and other notable events.
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