Match Your Business Structure to Your Management Strategy

By Geoffrey Bartels

We all want our business to grow. But this won't happen without some forward thinking. There are many issues to consider when planning for growth – even if you are just starting out in business.

As your business grows, you will have many exciting opportunities. But you will also face greater risks, increased costs and a heavier workload. When planning for growth, it is important you structure your business to ensure you can maximise opportunities and minimise risks.

You should seek advice from a business lawyer to ensure your business structure will help, rather than hinder, your growth objectives.

Business structure

Many small businesses start out as sole traders or partnerships but find they outgrow this structure. It can be very satisfying to be your own boss. But there are big risks involved too. And, unless you have access to large amounts of capital, your opportunities for growth may be limited. As your business grows, you may also have to change the way you manage your risks.

Most medium to large businesses choose to operate as a company. There are good reasons for this: a corporate structure offers a good way of raising capital while limiting your personal liability if things should go wrong.

Protecting your assets

A growth period may be a particularly risky time for your business. It is thus important that you protect your assets and limit the risk to yourself if things go wrong. A corporate structure is a good way to separate your personal assets – like your home – from your business assets. This means that if your business goes into liquidation, creditors cannot go after your individual assets.

There are many benefits of a company structure for growing businesses. But it is a big step – there are complex rules applying to companies and there will be substantially more paperwork and administrative costs. But the effort can pay off if you choose the right time to structure your business in this way.

Sometimes companies take very complicated forms, with an umbrella company owning sub-companies. These may be useful for the purposes of sharing risks across the business and minimising tax. A business lawyer can advise you on the most appropriate way to structure your company.

Minimising Tax

As your business grows, there may also be changes in your tax liability. If you run your business as a sole trader, you will pay tax at the personal tax rate. This may be beneficial if you have a small turnover or run at a loss for a short period of time, as losses can be offset against other personal income or future earnings.

But as your business grows, and profits increase, you will reach a point where it becomes tax inefficient to continue to do business as a sole trader, because the top company tax rate is lower than the top personal tax rate. This can have serious implications on cash flow and profit.

Financing your business

In order to grow your business you will need access to finance. You will need to consider ways of making your business attractive to investors.

Common methods of business financing include:
  • Taking out a loan from a financial institution. You will usually need to provide security over the business' assets. You may also use your personal assets, such as your house, as security for a business loan, but there are obvious risks attached to this.


  • Selling shares in your business – also known as “going public”. This can be a good way to raise funds, but you will also have obligations to your shareholders. You must meet requirements under the Corporations Law , which are designed to protect investors.


  • Borrowing “venture capital”. If your business is speculative or high risk, you may be able to take a loan from a “business angel”, who will receive an equity share in your business.


  • You may also be eligible for Commonwealth or State Government assistance for research and development, depending on your industry and the nature of your expansion plans.
Joint Ventures

Depending on your growth plans, you may want to embark on a joint venture with another individual or business. This means you can work together on a specific project without merging your businesses.

Joint ventures allow you to work on a project that would be too large for you tackle otherwise. You can draw on others' skills and experience, or use their assets, while sharing the risks involved in larger ventures.

But you must take care that each party is covered by a strict legal agreement. It is crucial that you get legal advice – even if you intend to operate as a joint venture, a court may deem the arrangement to be a partnership, which means you may be liable for the losses of the other party.

Franchising

If you have a successful business with good brand recognition, you may want to consider growing your business by franchising. As franchisor, you can allow others to sell or distribute your goods, or provide services under your business name, or use your marketing plan. This may be an effective way to expand your market reach. You will receive a fee, which can include a percentage of income.

It is important to get legal advice if you are considering this option. There are strict legal requirements for franchisors, and many risks involved.

Questions to ask

There are a number of questions you should ask yourself when matching your business structure with your management strategy:
  • How will the structure help you grow your business?

  • What risks are involved?

  • Will you have access to enough capital?

  • How will you bring new skills and knowledge to the business?

  • How can you get the edge on your competitors?
Part of running a successful business is knowing when to take the leap and expand your business. Business growth will always involve a degree of risk, but with the right advice you can minimise the dangers and grab hold of opportunities.

Plan for success

To succeed in business, you need to plan carefully. But the best people in business are never complacent – they know the value of good advice.

Don't leave the success of your business to chance. Bartels Business Lawyers are experts at providing business advice. We can help you nurture your business to grow it to its full capacity.


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