May 10, 2018
THE STARTUP SERIES
6 KEYS TO STARTUP SUCCESS
This is part 3 of a 6 part series. In this series, we will be covering 6 keys to unlocking your startup success. If you would like to stay in the loop on essential startup information and have the series sent directly to you, fill out your details at the end of this article.
6 Keys to Startup Success series overview- click to view
CHOOSING YOUR BUSINESS STRUCTURE
By now, your start-up may be gaining traction, but have you thought about how your business should be structured?
If you have simply registered for an ABN using your own name and started operating your start-up, then you will be a sole trader. In doing so, you may be exposing yourself to significant and potentially unnecessary personal and tax liability. Put simply, your family home (and other assets) could be at risk if your business becomes insolvent.
In this article, we consider the different types of structures that your start-up could operate through, and why it is crucial for you to think about this now instead of waiting.
A partnership is a common business structure that may be used when you have at least one other business partner and you operate as co-owners of the business and share equally in its income.
It is common to build a business idea with a friend or colleague and begin working together to establish the business. Especially at the beginning of the relationship when you are both equally ambitious about getting your start-up off the ground, you might not even have contemplated what you will do if you disagree about the direction of the business or how to manage a dispute.
A partnership agreement, if put in place, can detail how income or losses will be distributed, how the business will be controlled, and how disputes will be resolved. Some of the key advantages of a partnership structure include that it is relatively easy and inexpensive to set up compared with a company. However, unlike a company, a partnership is not a separate legal person. Instead, all partners are personally liable for the debts of the business, and you all act on each other’s behalf. This means that your personal assets may not necessarily be protected if you are sued or become insolvent.
It also means that unknown to you, your business partner could commit you to liability for debts without your knowledge.
However, without even documenting any sort of formal agreement, you may already have formed a partnership structure, and it is therefore critical if you wish to continue with this structure that you put a formal arrangement in place.
This will give you the framework to properly deal with issues that may arise as your business grows.
2. Private Company
Another type of structure that may work for your business is to create a proprietary company limited by shares. This is your garden variety Pty Ltd company.
A company has a separate legal existence from its shareholders and directors, however it can buy and sell property, incur debts, employ staff, and sue and be sued, just like a natural person.
If you are looking to attract great talent to your start-up, a company structure can be a great way to flexibly allow new employees to join the business by granting them a shareholding in the company. This is commonly done by implementing an employee option plan, which is an equity incentive arrangement allowing your employees to acquire shares in the company at future preferential prices.
A company structure also has significant tax benefits in that you will pay tax at the company rate of 30% instead of the individual income threshold rates.
One of the major appeals of incorporating a private company for your start-up is to protect your intellectual property, such as your logos, phrases, ideas and designs.
If you need a refresher on why your intellectual property is so valuable you can read our previous article from this start-up series here.
One way that you can protect your intellectual property is by structuring your company with two entities, being a holding company and an operating company. The operating company can enter into contracts with employees, clients and suppliers, for example, whereas the holding company will usually control and own intellectual property and licence it to your operating company or to other subsidiary companies as your business grows for royalties or fees.
Further, by holding your intellectual property in its own holding company separate from other assets, the intellectual property can more easily be sold or used as security.
In addition to obtaining legal advice, we also strongly recommend you speak to your financier or accountant about incorporating your start-up, as there may be stamp duty implications and tax advantages or implications through delegating IP licence revenue.
The third business structure that could be suitable for your start-up is to establish a trust. A trust is a legal structure that allows a person or company (a “trustee”) to hold property for the benefit of other people, known as “beneficiaries”.
The trustee is legally responsible for the operation of the trust and has special legal obligations, known as “fiduciary obligations” to hold property or assets (such as your business assets) for the benefit of the beneficiaries.
Broadly, one of the most common trust types is a “discretionary” trust which allows you to choose which beneficiaries receive distributions of income. The main advantage of this discretion is that the income generated from your business activities and investments can be distributed to beneficiaries that are in a lower income tax bracket, such as your children or spouse.
Further, if you intend for your start-up to become a family business, the assets can be passed from one generation to the next through the trust without any need to transfer property.
If you’re still not sure which structure would best suit your start-up, remember that you’re not locked into any structure and that you can change your structure as your business changes or grows.
Remember though, the sooner you set up your business structure for the future, the less tax you will pay to make that change.
In our next article of the 6 Keys to Startup Success series, we will be looking into shareholders and partnership agreements. To read our previous first articles in the series and to find out what will be covered in the following weeks- click here This is a 6 part series in which we will be covering the keys to unlocking your startup success. If you would like to stay in the loop on essential startup information and have the series sent directly to you, subscribe below.
Whether you are in the preliminary stages of a startup or have been operating for a while, we are more than happy to meet with you for a FREE initial consultation to discuss the documents you need or review what you may already have. To request a complimentary consultation with a member of our team or if you have any questions or concerns about any of the content mentioned please contact McInnes Wilson Lawyers Principal Mark Woolley or Associate Andrea Hetherington for further assistance.