Q. What is the right structure for my business?
A. By East Lancs based Corporate Partner James Allison
We regularly see examples of business owners that have not given thought to their business structure until they grow to such a size that they simply have to address it.
There are issues to consider when deciding on the right structure. For example, a sole trader (or ‘partner’)can establish a new company with which they then form a partnership with an existing business. This ‘corporate partner’ can then legitimately be allocated a significant part of business profits and because it is a corporate entity will only be subject to corporation tax, often at the small profits rate of 20%. Profits can potentially be extracted from the company in the future at lower income tax and / or capital gains tax rates.
Corporate partnerships are a popular form of tax planning, which your accountants can advise on, as they can help to reduce the exposure of sole traders and individual partners to the 40% and 50% income tax rates.
Whilst you work hard to make your business successful, consider the following too:
- Do I have the most tax efficient structure?
- If you are a sole trader, would a limited company be more appropriate?
- If you trade as a limited company have you made the most of this structure to be tax efficient?
- What else can you do to mitigate your personal and business tax position?
- What savings can be made and how?
- What is the relationship between the owners of the business?
- Have you got a shareholder’s agreement setting out who owns what?
- Is each stake-holder seeking to achieve the same aims?
- How do you control the behaviours of the shareholders?
- What if you want to sell the business and other shareholders don’t?
- What if one stakeholder falls ill or passes away?
For a limited company, this clarity is usually achieved through a shareholder’s agreement.
However, we continually see examples where these issues are not thought about until too late. So, if these questions have set you thinking about your own situation, talk to a specialist lawyer for advice on the best approach for you and your business.