Succession planning – Structuring your business

None of us like to think of a time when we won’t be around anymore, but this needs to be considered up front so you can plan for it effectively.

Whether you plan to sell your business on your retirement, leave your share to your partners or hand it on to your children will influence the type of structure you choose. It’s also important to consider what you would like to happen should you pass away while you are still holding the reins. You need to consider who will control the income and assets of the structure and how this control could be changed, if required.

If you plan to sell, will you sell the entire business or just its assets?

Before answering that question, you need to ask yourself whether your business has a value in the open marketplace. Many business owners run their businesses and generate good incomes. Unfortunately, when it comes time to pack up the toolkit, their businesses do not have real value to anyone else because they themselves are ‘the business’. The business cannot run without them, hence there is no value. A harsh reality, but definitely one that is better knowing now rather than later.

If you find yourself in this position, you may be able to sell your business’s assets, but will likely struggle to sell the business itself. If, on the other hand, your business could run effectively without you in it, you have options.

If you have a company structure you have the option of selling the shares in the company or just the business interest the company operates.

If you sell the shares in the company, then the capital gain or loss sits with the shareholder that sells the shares, which could be an individual or a trust, depending on how the company was structured when incorporated. That shareholder will need to report the capital in their tax return. If the company sells the business interest, on the other hand, then it is the company that has made a capital gain and loss, and it would need to report that capital gain or loss accordingly.

If the business is operated under a trust, on the other hand, it would be difficult to sell the interests in the trust.

Trusts are established for the benefit of its beneficiaries, which are generally family members when it comes to discretionary trusts (the most common trust structures established for business).

If you are operating your business in a discretionary trust, or planning to do so, please consider your succession planning as, if you are likely to sell your business to external parties, you will likely be selling the business assets, rather than the interest in the trust.

If your intention is to pass the business to your children, a trust can be a cost effective and easy option.

As your children are already beneficiaries of your trust irrespective of whether they are named beneficiaries or not. It is standard in discretionary trusts that your children, along with siblings, parents and so on, are all unnamed beneficiaries. There is no obligation to distribute any funds to them at any stage, but the option is there for you should your circumstances warrant it (such as when your net business income is at a high level and you wish to save tax by utilising as many of your family members lower tax rate thresholds).

Another consideration is small business CGT concessions on the sale of your business or its assets.

When it comes to CGT, an individual and/or trust is able to access the CGT 50 per cent discount while a company cannot, therefore this should be kept in mind when considering succession planning and choosing your business structure. If your business is considered to be a small business entity (with turnover of less than $2 million), additional CGT concessions – like the 50 per cent active asset reduction and the $500,000 retirement concession – will play a significant part in your decision.

We can sometimes be guilty of only thinking about the present when starting a business. If that is the case, you could cost yourself significant dollars when the time comes to leave.

Consider all options and speak with your Trusted Adviser before making the final decision on the structure of your business.

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Tony Dimitriadis
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