I am often approached to advise on the corporate structure of a businesses. More often than not, I am left wondering, what was the thought process that went into the setup of that business?
I have seen a range of things. But what irks me most are convoluted setups that, for no discernible reason, are complex and cumbersome. I have always been a proponent of the KISS principle: Keep It Simple Stupid.
Business structures do not need to be complicated.
More often than not, the simplest structure is the best structure.
When assessing business structures, my starting point is to ask: What goals need to be achieved? In other words, what is the potential end goal and how can a particular structure can affect that? When it comes to structuring, achieving the best tax outcomes and protecting an individual’s private assets are probably the two most important issues.
Structuring for tax
From a tax perspective, it is important to be aware that there is not one perfect structure for all tax situations. One structure may be good from a capital gains standpoint but have limitations from a day-to-day tax effectiveness standpoint, and vice versa. When considering tax outcomes, I often try to strive for a balance, but it depends on the particular business and its needs.
Structuring for protection
For asset protection, the structure must remove risks to your assets from business events. Please, please remember that the best asset protection can be undone by personal guarantees. Recently, we removed a personal guarantee from a client’s lease by agreeing to an additional month’s rent as a bond – taking away the risk to the client’s assets.
The simpler you keep the structure the easier it will be to understand and the more effective it will be in delivering its goals. Moreover, the cheaper it will be to do your annual compliance and ultimately the less headaches you will have.