Do you have the right structure for your business?
Trading out of a discretionary trust (family trust) may have some advantages in the early stages of your business cycle. However, as your business grows it may leave you exposed to problems in the future. At the end of every financial year a trust needs to distribute all of the business profits to its beneficiaries. This can potentially leave the owners of the business paying a high marginal rate of tax. In addition, if you are looking at building your business for an exit, it will be harder to sell your business if it’s trading out of a family trust. All business owners should acknowledge that their business is a financial asset and therefore should be ready for a future sale if required.
During a consultation session with one of our clients, Leonard Archer – owner of Fasteners Direct, we identified that the family trust structure used as a main trading entity for the business posed many constraints on future growth. The team at Tradies Accountant developed a solution to help Leonard transition from a family trust to a company structure. This conversion resulted in tremendous advantages for the business moving forward.
- We were able to apply the small business tax concessions available to mitigate capital gains tax liability. In turn, the cost base of the business was lifted and no capital gains tax was payable. This leaves the business in a good position for the future if there is ever a business sale. These tax concessions would not be available if the business kept growing at the same steady rate. The proactive advice and restructure implementation has potentially saved hundreds of thousands of dollars.
- A company structure has a relatively low tax rate and as a result of a restructure we were able to reduce the marginal tax rate of the client saving a lot of money by using the company tax rate. Franking credits would now be accumulated in a company structure which means franked dividends can be issued to the company’s shareholders.
- The business is more viable commercially and important ratios and other business metrics can be identified as the business now trades from a company structure and correct salaries are allocated for the business owners. We believe using beneficiary distributions (in a Trust structure) creates an inflated profit figure in the eyes of the business owners. In comparison, by allocating correct salaries, a normalised profit margin can be identified and valuable business advice can be provided in order to increase the said margin as well as other key performance indicators of the business.
Structuring is an important concept that business owners need to understand and know how their business strucutre impacts on their future goals. At Tradies Accountant, we will always advise a business owner on the appropriate structure that is aligned with their goals.
Contact us, to see what we can do for you.