This article, originally featured on Business News Australia on 2 February 2023 by TWIYO’s Managing Partner, Ryan Barnes, explores the significance of corporate structure in business operations. A well-planned and executed structure is essential for effective risk mitigation, streamlined administration, and asset protection. Investors, future directors, and strategic advisors expect this hurdle to be cleared early on in the business lifecycle, before significant value is realised.

What is the group structure?

A group structure refers to the way legal entities are organised and connected, including the relationships between the parent company, subsidiaries, and other affiliated entities. It outlines how the ownership and control of different business units are distributed and how they interact with one another.

Think of it as the ‘org chart’ of your company. Some businesses may only have one company (we get to that later), but more often than not there are several.

A group structure can have a significant impact on a range of factors; including legal liability, tax obligations, operational efficiency, and overall management and governance of the business.

Why now is better than later

While it may be tempting to adopt an alternate structure later down the line, doing so can be more complex, expensive and even prohibitive from a tax perspective. Therefore, we strongly advise entrepreneurs to think about this right from the start.

“Corporate structure matters. While it may be tempting to adopt the right structure in the future, we strongly advise to get it right from the start.” - Ryan Barnes

In our view it is imperative to “do it right the first time” as future investors, acquirers, directors and even employees under an employee stock options plan (ESOP) rightfully expect that basics, such as the right corporate structure, is covered in the early stages of a business, before capital is raised and value realised.

Which vehicle is right for me?

Companies and trusts are the predominant vehicles to implement in company structures, with each having a list of pros and cons.

Sole-traders and partnerships are not suitable for larger enterprises aspiring to create organisations of reasonable size and scale, as they are littered with personal liability and do not allow for concepts like shareholders.

Operating trusts are simple for family business affairs and taxation, but for those building enterprises for investment, sale, or scale, it's better to leave them in their rightful place.

So where do we go from here?

There is no one-size-fits-all blueprint plan for creating the perfect corporate structure, as every company has unique needs and challenges that require tailored solutions.

However, there are a number of common themes, and over the years, we've advised many fast-growing companies, which helped us put together a list of key points to consider. These may be (in no particular order); seek advice early, use trusts and companies, separate business units, protect intellectual property, and document everything. Also, consider personal and family factors, consolidate taxes, and creatinga foundation of risk management, taxation, and pragmatism.

With these concepts introduced, here are our 12 tips to help business owners optimise their company group structure:

1. Get advice early - It's easy and inexpensive to get right from the start. The longer you wait, the harder, more expensive, and perhaps impossible it may get
2. Triangulate information - Between lawyers, accountants, and other entrepreneurs and
3. Use of trusts and companies - Think intently about where and how each could be use
4. Do not neglect your own personal structure - Just like a business, you should consider your own personal and family structure. Take the same level of consideration into this arena to
5. Protect IP - Identify all the important business IP and hold it separately from the operations of the business. This part, you should involve your lawyer
6. Separate business units - If the operations and risk of parts of the business are wildly different, consider them as standalone entities. It will also force you to report them separately
7. Document everything - You should have your corporate structure on hand, including demonstrating how and how you arrived where you are
8. Consider tax consolidation - Some entities may be profit centres, some might be cost centres, a tax consolidation will rebalance this out and summate them to ensure no tax leakage;
9. Consider a parent/holding entity - It is common that your group structure has a parent entity. This is where you will want to consolidate operations, hold shareholding and perhaps debt;
10. Understand the practicalities - If you have multiple entities, this means more bank accounts, different accounting files, managing contracts and payroll in the right entities and overall, more emphasis on administration and accounting; you need to be “up for it” and make sure you have communicated this across your business and advisors;
11. A new entity is not always the answer - You can become trigger-happy, in setting up new companies for everything. This will ultimately be cumbersome and expensive; and
12. Paying no tax is not a realistic expectation - Obviously pay the least possible. Just think carefully about complex international structures, their purpose and get a second opinion

To put it simply -  good structuring is built on the foundation of risk management, a splash of taxation and a hint of pragmatism. Get ahead of this and start socialising these questions with your advisors, colleagues and stakeholders.

If you want to learn more or have a chat about your own circumstances, please contact us and provide a brief description of your situation.

The original article featured on Business News Australia can be accessed here.