Structures & Ownership
Every legal entity form that Australian businesses may take comes with costs, benefits, opportunities and risks:
- Sole trader businesses are easy to set up but have unlimited liability and are usually impractical for fundraising or employment.
- Partnerships come in multiple shapes and can confer taxation and contracting benefits, but ultimately at least someone or something has to bear residual liabilities.
- Joint Ventures and Trusts can be very good from a taxation point of view, but can be very complex to set up and maintain.
- Companies have many benefits, but are still potentially complex to set up and maintain, and may be inflexible.
- Incorporated / Unincorporated Associations have some advantages, eg in the Profit for Purpose sector, but may be restrictive.
When considering legal structures, we recommend that you consider the following, as a minimum:
- What are your personal taxation and liability needs and concerns?
- How and where will the business operate? Will it employ People?
- Will it have to raise money?
- Might you wish to sell the business or the entity itself?
- Will you have partners, and what are their needs and concerns?
On the subject of business partners, its also critical that you have formal structures in place that will govern your dealings between yourselves, especially disputes and entry / exit arrangements.
Businesses can source relatively fixed capital by issuing shares, or taking out bank loans or equipment finance. Investments and long term debt can be self-sourced or provided by related or entirely independent parties. Consider these issues when you seek Capital Funding:
- If you self-fund, you may be limited by your own resources but you are answerable only to yourself.
- Related party funding, eg from family, often come with strings.
- Independent investors and lenders will have their own needs and terms – know what you are truly up for, if you accept their funding.
- Long term debt should not be used to finance day to day operations, if possible – it is best used to finance well thought-through business acquisitions or launches, or capital expenditure.
- The more independent your Capital Funding source, the more likely you or your business will have to offer security and pay fixed returns.
- There are different taxation and liability implications to investment vs debt Capital Funding.
- Never offer shares or take out debt without getting expert advice.
All business opportunities come with Risks. And every successful business has to plan for and manage its Risks over time: some have very formal processes and use complex tools; some rely more on personal reflection (eg periodical “SOWaT” analysis – Weaknesses and Threats are both Risks). The right process for your business will usually be determined by your business’s Risk Profile (eg its industry and circumstances), and your own Risk Appetite.
- Some Risks never come to pass, and others are unforeseeable. Risk Management requires judgement, which is rarely perfect.
- Not all Risks can be prevented, but some can be mitigated (eg through “contracting out” or Insurance).
- Some obvious Risks are actually not that important, because while their “likelihood” is high, their “consequences” may be relatively low. It may be most cost effective to accept those Risks.
- You may be required to carry out formal Risk Management by key Customers, industry licensing or investor / lender requirements.
- Risk Management needs to be done at regular intervals – one common practice is to update your review every quarter, supplemented by appropriate evidence gathering (eg through our Business Health Check).
Finally, good Risk Management can only really be done by those who are close to a business. You can hire a consultant to give you advice on tools and techniques, and challenge you where necessary, but they can’t exercise your judgement for you.
We find that many business owners and leaders are confused by Insurances:
- They don’t know which policies respond to which risks.
- They don’t understand the jargon used by brokers and underwriters.
- They don’t properly understand exclusions and excesses.
So we advise our clients to work with insurance brokers who help them to navigate these issues in plain language terms, and ensure that the business’s insurance program is properly aligned with its Strategy, Operations and Risks.
Good insurance brokers are excellent examples of trusted advisers, just like great lawyers, accountants, strategic business advisers and other professional experts.
No business owner or leader will have all of the skills that they need in house to make the decisions that can make or break a business. However, it can be difficult to find good advisers at a fair price, especially when your business is relatively small – that’s where we come in.
IP is an often-overlooked area of business, and its becoming increasingly important as Australia’s economy swings further towards service sectors, and as Australian manufacturing becomes ‘smarter’.
Many businesses are unconsciously generating or using valuable IP every day – and if they don’t know that, they can’t plan to seize those opportunities (eg by protecting and commercialising it) or manage those risks (eg by breaching others’ statutory or contractual rights).
Always be conscious of IP in your business, especially given that you can’t ‘see’ it. If you have good IP strategies and processes you will make your business healthier and valuable over time.
Structures & Risks Performance Monitoring
Monitoring Structures and Risks requires conscious, planned effort at the right intervals:
- We usually recommend that Risk Management and IP reviews take place each quarter – this is also a good time to look at your business’s insurances to ensure they remain a good fit, rather than waiting for an annual policy renewal process.
- Structures and Capital Funding may be easier to review on an annual basis, but if your business is going through turbulent times, or you are considering making new investments (or divestments) or major changes to your Strategy, you may need to take a look at either or both at the same time.
- The best time to consider your choices of trusted advisers is when you are refreshing or replacing your Strategic Plan – after all, you deserve the best help you can get, to make your Strategic Plan and business the best it can be.