Building a Business is like Building a Home

The philosophy and framework needed to build a home is much the same as that required to build a business. Both processes, whilst uniquely different, require well thought out and strong foundations to support the impending growth.

The first step in the process is developing a vision of the business you hope to build. The vision is followed by the documentation of that vision on a piece of paper in the form of a business plan. That said, a builder can’t start building a home until the plans and drawings have been well thought out and documented, likewise, a business that lacks sufficient detail in its design from the outset is likely to experience the consequence of that lack in detail, in the future.

Looking at the business life cycle from a legal point of view, the start for most businesses would be to decide what type of business structure they will choose for their new business venture. Each type of legal structure has its pros and cons which may be suitable for you depending on what your endgame is. The choice of structure will ultimately depend upon 3 factors, including your:

1. Risk appetite (and desire for asset protection);
2. Budget; and
3. The taxation implications of what you are proposing to do

There are four broad types of business structures:

Sole trader

The sole trader structure is a simple business structure where a person will operate a business under an Australia Business Number (ABN). This structure is well suited for very small “one man band” type businesses where one person is doing all the work and making all the decisions. The one significant disadvantage of being a sole trader is that there is unlimited liability, meaning the business owner will be personally liable for all debts and liabilities of the business and there is no legal separation between the personal assets of the individual or those of the business.

Company

The company structure is the most common form of business structure. A company is a separate legal entity, meaning it is separate from its owners and directors, unlike a sole trader. The key implication of this, is that the company can sue and can be sued in its own name. Liability of individual directors is limited to the activities they undertake as directors of the company. Upon formation of the company, shares are issued to owners and directors are appointed to manage the business.

Companies are a more complex structure and can (but not always) be more expensive to set-up. They also have complicated reporting requirements and are under increased regulation.

Partnership

A partnership consists of two or more people coming together to form a business. The people in this partnership will distribute both profits and losses between themselves. Generally, a partnership is inexpensive, simple to set-up, easy to dissolve, has minimal reporting requirements and creates a structure where control and management of the business may be shared amongst the partners. Much similar to a sole trader, each partner will be personally liable for the debts and liabilities of the partnership and each partner will be bound by the conduct of one another.

Trust

A trust is created where a person (a trustee) holds property, incurs liabilities and earns and distributes income for the benefit of others (the beneficiaries). The trust is created by executing a ‘trust deed’, which sets out who the trustee will be (it may be an individual or company), who the beneficiaries will be and how the proceeds of the trust will be distributed. A trust can be a more rigid structure in that it requires the trustee to undertake administrative tasks yearly. On the flipside, one of the advantages of a trust, is the discretionary tax benefit that is provides (particularly if the business is likely to make a capital gain).

Trusts are often used most beneficially in conjunction with companies to help achieve asset protection and income splitting.

The Catch

For most the business journey is not that dissimilar to the roller-coaster of life, in that some things turn out much better than expected and others turn out much worse. Many scenarios that were not contemplated when you started out on the journey bear themselves before you in the form of hurdles or opportunities. Whether you are breaking your business down and building it back up or adding another level to what you already have, the most important variable is the strength in the foundation that you set at the very beginning of your business journey. For those of you that have business partners, the mortar in the foundational mix comes in the form of managing the expectations between you and your business partners and the other stakeholders in your business. The strength of those relationships relies heavily on how well you have documented those expectations in the contracts you have with them (whether it be agreements with your business partners, your employees, your customers, or clients).

Below we have set out a few brief notes to help you test the foundations of your business:

1. Draw a mind map of your business and the relevant stakeholders in that business;
2. Ask yourself whether you have specified expectations of that stakeholder; and
3. Put those expectations on to a piece of paper in the form of a contract.