Often, tech companies get started on a wish and a prayer
The founders have a great idea, apply for an Australian Business Number (ABN), or set up a company and don’t give the structure of this new business a second thought as they barrel forward with hours upon hours of development activities.
While setting up a company might provide some sense of security in the short term, the longer that founders go without properly evaluating their structure, the more difficult and expensive it is to change in the future.
This may not mean much in the early days, but when the value of intellectual property begins to increase so too do founder’s concerns about protecting it.
Start with the end in mind
Every business needs a structure that is fit for purpose.
This means it aligns with the founder’s vision and goals for the business, such as whether they wish to:
- grow the business
- run and hold the business
- publicly list the business
- sell the business
Even if the ideal structure or end state is not yet known, most (if not all) possibilities can be accessed if the structure provides enough flexibility from the onset.
A company is not always the best structure, and the same applies with a trust. The right structure considers a wide variety of elements – from who is involved in the company to the types of products and services you offer, to how and where you operate.
The disbursement of profits, application of capital gains tax, implications of tax across multiple jurisdictions and so on, can have a big effect on your ability to reach a cash flow positive state sooner rather than later.
The right structure reduces risks and invites opportunity
As your business grows, so too will the value of your intellectual property. However, without the correct structure in place, that intellectual property could be at risk.
For example: when you operate your business as a single entity, all of your intellectual property is contained within that entity. This means it’s fully exposed to any potential risks your business could face in the normal course of doing business.
Your structure also impacts your ability to fully leverage opportunities and maximise profits, such as licensing your product to overseas companies and receiving royalties without paying an exorbitant amount of tax. Or, making use of new incentives such as the ‘patent box’ tax scheme introduced in the 2021 Federal Budget, where company income derived from medical and biotech patents will be taxed at a concessional rate.
Ideally, you’ll want to ensure that your structure is flexible to support you as you grow and make new decisions about your business trajectory. The right structure could involve allowing for the movement of assets and functions between various entities within a group, which can be done without too much cost and administrative burden.
Smart structures help you scale with ease
It’s common to be strapped for cash in the early days of your venture, and every penny can help with keeping your dream alive.
When you have the right structure in place, it allows for the implementation of smart incentives – such as an employee share scheme (ESS) where employees are offered shares in the company as part of their employment arrangement.
An ESS is a great way to reduce the cash remuneration paid to skilled employees who join the business while aligning their goals with yours by giving them skin in the game. It can also be tied to performance, which drives employees to achieve certain results and helps you grow the business while rewarding them for their efforts.
It’s important to consult with your financial adviser before setting up an ESS, because the way you do it can impact your business’s future. The Australian government has recognised the true value of employee share schemes in the 2021 budget and offered even more simplified measures to make it attractive to business owners. Your financial adviser can support you in making full use of these incentives.
The way your business is structured may also impact your eligibility for certain incentives, such as the R&D tax incentive or government grants. So, it is worth getting the structure right early on so you can leverage all available sources of funding to help your business grow.
Choosing the right structure for your business is not as simple as weighing the options between sole trader, partnership, company or trust.
It’s a crucial step in the longevity of your business and can have very real effects on the challenges and opportunities your business will face in the future.
The team at RSM can help you choose and implement the best structure to meet the needs of your business and align with your goals. It’s a small cost now for a huge benefit later, and will give you confidence as you focus your time and effort on achieving success.
Author: Peter Revelas, RSM.
Peter is a partner in RSM’s Sydney business advisory team. Peter is an experienced accountant who understands the complexity of business operations and family dynamics, which allows him to provide valuable and practical advice to clients.
RSM is a sponsor of Startup News.