The entity or legal arrangement through which a business operates is known as its structure. This could be a sole proprietorship, a partnership, a company, or a trust. In many cases, businesses also set up multiple entities for different purposes.
What a Business Restructure Can Look Like
Many businesses will undergo a business restructure at some point in their journey. There are several strategic reasons for this, including:
- Asset protection
- Attracting investors
- Meeting bank or finance requirements
- Tax savings
- Introducing employee incentives
- Responding to legislative changes
- Acquiring another business
- Managing family changes
- Succession planning
Moving From Individuals to a Company Structure
For example, many businesses begin with an individual owner or a partnership, such as a husband and wife team. While this may suit the early stages, as the business grows, that structure may no longer be appropriate.
When business assets are owned by individuals or partnerships, all personal assets, including homes and investments can be exposed if the business faces legal action. However, by restructuring and transferring the business into a company, that liability becomes limited. In this case, the original owners typically receive shares in the company in exchange for the business assets.
Asset Protection Through Business Restructure
One of the biggest advantages of a business restructure is limiting personal liability. A company structure means that, broadly speaking, shareholders are only liable up to the amount of their share capital. While directors may still carry some responsibilities, the risk to personal assets is significantly reduced when operating through a company.
Tax Implications to Consider
Tax outcomes need careful planning when undertaking a business restructure. The transfer of business assets, especially goodwill can trigger a capital gains tax event. Fortunately, there are rollovers available under capital gains tax legislation that allow businesses to transition into a company without incurring immediate tax liabilities.
It’s also essential to compare the tax rates between the original structure and the new one. Most small business companies in Australia pay a 25% tax rate. Further tax may be payable when profits are distributed as dividends, depending on the shareholders’ personal tax brackets.
Other Rollovers and Complex Restructures
Beyond the example above, there are several other rollover concessions and structuring strategies available to facilitate a business restructure. The process can become complex depending on your business’s size, assets, and long-term goals.
Need tailored advice on your business restructure?
If you haven’t revisited your business structure in some time, it may be worth speaking with your accountant to determine whether it still serves your needs now and into the future.
Book an appointment with our team of experienced tax advisory accountants and ensure your business is structured for success.