This is a fairly technical article - but it is an important one.
All too often, I see business structures slapped together with average advice from accountants.
And one of the killers is just setting up a company, with individuals (usually the business owner / owners) as shareholders.
Now being open, this isn't something that will hurt you now. There's usually no instant adverse effects of having an individual as a shareholder.
But it will hurt you in the following circumstances:
All of these situations happen fairly regularly.
The problem is inflexibility for tax purposes.
If you sell the shares in your company - you only have potentially one individual who will pay capital gains tax on the sale.
If you issue a dividend, you are restricted to the shareholders, and cannot redirect these dividends to another taxpayer.
I have seen this happen - and it's not fun for anyone.
The business needs a valuation as at the date the fix needs to happen.
This can cost $4 - 10k+ payable to an accountant to value the business.
Then you've got the change to ASIC register, and more forms to fill out. Potentially enlisting lawyers to help with the transfer / estate planning. Minimal cost, but just adds to the tears.
And then you'll have Capital Gains Tax to pay - he more valuable that your business is, the more this will hurt.
By having a discretionary trust own the shares, you have the flexibility of who in your family group pays the tax on any capital gain from the sale of your business.
You can also issue dividends from the company, payable to the trust - which can then choose which individuals receives that entitlement.
In the long run, this can potentially save to tens of thousands of dollars in tax.
So my advice is to get it right from the start!
Oh - and it may not be wise to set up your business in a company in any case. You can use a discretionary trust to run your business - just depends on your circumstances.
Chat to someone who knows their way around business structures!
For every dollar in tax we save a small business, we give a family in need a days worth of access to life changing help. Here are some of the impacts -