Nothing is permanent except change.
Often, businesses outgrow the structure they were once set up with.
The trigger might be as simple as organic growth where a sole trader takes on a partner, or it could be a lot more complex due to succession or estate planning.
Common reasons we see for the change in a business structure include:
- Change in management where a business owner takes on a business partner, e.g. a sole trader changing to a partnership or company.
- Asset protection for personal assets, e.g. changing a partnership structure that gives rise to joint and several liabilities to a trust with a corporate trustee.
- Splitting business enterprises so that each operates as a standalone, generating their own profits and bearing their own risks, e.g. splitting a single business into two trading trusts or companies.
- Inter-generational change to facilitate the next generation taking over, or the previous generation retiring, e.g. changing from a partnership structure to a trust.
- Financial simplification and cash flow improvement, e.g. changing from a trust to a company structure to reduce sub-trusts and farm management deposits.
- Access to incentives and concessions, e.g. operating as a company to get access to the research and development tax incentive or changing from a company to a partnership to gain access to farm management deposits and primary production averaging.
- Access to markets and clientele, e.g. operating as a company to tender for government work.
- Simplifying operations to prepare for retirement or reduce ongoing compliance costs, e.g. winding up a company and operating as a sole trader.
One of the main reasons businesses continue unchanged is the cost associated with restructuring.
These costs include income and capital gain taxes, transfer duties and the cost of the restructure itself.
On 1st July 2016, the Federal government introduced some concessions that make a genuine restructure more cost-effective for small businesses with an aggregated turnover of less than $10 million.
This change allows small businesses to transfer active assets from one entity to one or more other entities, without incurring an income tax liability. These active assets include capital gains tax assets, trading stock, revenue assets, and depreciating assets.
To gain access to these concessions (which can be considerable), the assets transferred must be active assets and there should be no change in the ultimate economic ownership after the restructure.
While the small business restructures rollover does reduce some of the costs of a restructure, there are other liabilities that require consideration such as state transfer duty and goods and services tax (GST).
As each situation is unique and the restructuring process can be complex and costly, we suggest that you discuss your short, mid and long term goals with an advisor when considering a restructure.
If you have any questions about business structures, please do not hesitate to contact your local RSM office.