Optimise the structure of your business from an early stage to avoid many potentially crippling problems including:
Personal Risk
The limited liability company was established to encourage entrepreneurs to take the risk of going into business. Even the smallest operator would be unwise not to take advantage of limited personal liability available when trading under a corporate structure.
No one goes into business to fail, but the statistics tell the story. According to the MBIE’s 2014 Small Business Sector Report, enterprises with fewer than 20 employees have lower survival rates than larger firms, with roughly a quarter of them not surviving within three years from 2010.
Co-founder Issues
Each participant in a business venture is likely to have a slightly different idea about how things should be done. Furthermore, as time passes, some may tire of the whole idea. Both of these scenarios negatively impact a business’s momentum. Unless the right constitutional mechanisms to resolve these kinds of issues are already in place, it can be very difficult to introduce them after trust has been lost.
Ineffective Management
Larger, well-established businesses with proven cashflow can afford to hire experienced professional managers. This is a “chicken and egg” situation, as unless an effective management structure is in place from the outset, a business is unlikely to ever reach that stage. The person with the loudest voice, or even the best idea or the biggest investment in the business may not be the best manager. Independent professional advice is a more secure route to take to achieve a successful management structure.
Investor Reluctance
Investors typically buy shares in publicly listed companies based on asset value, trading results, future growth potential, and share PE (price to earnings) ratios.
It’s a slightly different scenario for private companies, as there is often no ready market for their shares. This is where the right business structure can make all the difference.
While accepted wisdom may advocate setting up complex asset holding structures, this can backfire when seeking investment as canny investors want to be confident that they are buying into the most valuable part of the enterprise. It can be frustrating (and expensive) to have to unwind an overly opaque business structure to make investment possible.
Trust and Estate Troubles
There may be sound tax planning reasons for shares in a family business being held in a family trust, but what happens when you want to bring in an arm’s length shareholder? If expansion is going to be on the horizon, you need to be sure that the trust’s rules allow for it.
Another problematic scenario can occur where shares pass by transmission under a shareholder’s will. Unless a company buy-back provision is in place in the constitution or shareholder’s agreement, the other shareholders may have to work with an executor for a long period of time, and may end up with an incompatible business partner.
Tax Issues
Business structuring to meet tax obligations, minimise personal risks and facilitate expansion is a high priority for all businesses. This important topic will be covered at a later date.
Reading
Here are some useful links:
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