Why it is so important to choose a suitable business structure

Business structure is something you need to get right up front when you start the business. Otherwise, it can have a significant negative impact on your net worth.

When entrepreneurs start a business, their thoughts are usually on cash flow, market positioning, financing, employees, risk, and the like. They seldom look at what is the best business ownership structure to achieve these outcomes and longer-term wealth creation. Fewer think of the cycles business will go through or the changes that will occur over time, both to the business or their families.

When launching a business, consider what structure is best suited to it, now and in the future, and why. You need to address business structure before opening a bank account, signing the lease, purchasing plants and equipment, employing staff, and registering any intellectual property. It should be step one.

At Taxgain, we believe that you should always start with the end in mind. It means that when you are launching your business, you need to identify your long-term goals and needs. For instance, you may one day wish to protect the assets that you have built, you may require flexibility if your circumstances change, you might want to sell part or all of your business, or you may want to bring in new partners. Neglect this risk of paying tens of thousands of dollars or much more if you find that you need to restructure somewhere down the track. It takes good practical and business sense to separate your various assets into different structures, whether personal or business assets, and, further, between depreciating and appreciating assets. When you first set off on a new business venture, you don’t want to assume that something will go wrong; but you do need to prepare and plan for the unforeseen. By setting up your ownership structure correctly, you minimise your exposure to litigation risk so that if anything ever goes wrong, there is no impact on your wealth. Changing structure later exposes you to potential additional expenses such as capital gains tax and stamp duty.

Essentially, what you are doing is creating a “safe harbour” for your wealth to ensure that the wealth stays within the family (intergenerational wealth), with the additional benefit of not exposing your wealth and assets to any sort of risk.

You should also be aware that the “goodwill,” intellectual property, and trademarks you create in your business are valuable assets and must also be protected.

Beyond risk and asset protection, there are other important and practical reasons for using the most appropriate ownership structure for your business. These include:

1. Estate planning
2. Wealth creation

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