There comes a time in the lives of many businesses when it makes sense to change their operating structure. Whether you want to bring in more partners, improve your saleability or get the best tax rate, there can be many reasons to make the change, but knowing the best time to do so can be tricky.
When you should consider changing business structure
Many business teachings talk about the different stages of a business from launch through growth, maturity and, perhaps, decline.
Each phase of this journey requires careful consideration. Your business structure can have an impact on how well you do, how much you grow and how smoothly you decline – if at all. Careful planning when you start your business can set you off on the right foot, but that initial business structure shouldn’t be set in stone.
Why you should consider changing business structure
There’s no one-size-fits-all answer to when you should make a change, but there are several reasons that can make it a good choice.
Management or ownership change
As you start to grow your business, you may look to take on new partners to add expertise, working hours and capital.
You might have started the business as a sole trader, which made sense at the time but may now be limiting your options. Moving to a partnership or company in this instance could give you the flexibility you need to take your business to the next level.
Sometimes it can be beneficial to make this change before you get new partners on. If you’re looking for investment, being ready to take on shareholders immediately can make a big difference.
Different business structures have different tax rates, which can impact on how much of your income you get to take home. As every business is different, there’s no blanket statement on when you should make this change, but SmartCompany suggests that when you start earning around $117,000 per annum it might be the right time to investigate which business structure is right for you.
If you’re looking to sell your business, setting it up as a company can also be more inviting to potential buyers.
While your business structure isn’t a reflection of your quality of work, there are times when it can be instrumental to securing new business. Large organisations and government entities often prefer to deal with companies, as this gives them peace of mind that the work will go smoothly.
For businesses that operate as sole traders or partnerships, there is no differentiation between what belongs to the owner and what belongs to the business. If the business were ever to be sued, the personal assets of the owner(s) would be under threat.
By changing to a company structure, you put a line between what is yours and what is the business’. If the company were ever to get sued, your personal assets would be safe.
Should you change your business structure?
Many of these changes can work both ways – while you may want to consider change to facilitate growth, during periods of uncertainty a change can also benefit you if your company is downsizing or there are external factors that are influencing your business or industry.
Knowing how and when to make changes can be confusing, which is why it helps to get a professional to look at your individual situation. Call us on (02) 4044 1245 or download our free ebook on business structuring to find out more.