Over time, as your business grows and diversifies, it is wise to review a number of factors including your strategic direction, clientele, and your product range.  However it is equally important as you grow to consider whether your current business structure is appropriate for your changing needs. 

Recently we came across a business that had started small but had grown exponentially.  That’s the ideal scenario and many of you will be no doubt thinking, “Lucky for them”!  However, despite fast success and huge potential the business was threatened because of a failure to reassess the underpinning structure of the business as it grew. 

Crying out for Expansion

Being small, the business-owner in question began operating as a sole-trader.  This was sensible because it avoided some initial expense and the sometimes tricky legal requirements of limited liability companies.  The business was owner-operated, on-line, employed no staff and had few assets and liabilities.  However, as the market grew, expansion became inevitable. The business was crying out to be moved into shop premises with staff and assets.  This was possible by bringing in a third party.  The third party in question was a friend of the business owner who had always been passionate about the business and had been wanting “in” for some time. The friends enthusiastically agreed to work together, one bringing a successful existing online business and one injecting fresh capital.  Nothing was documented.  They were friends so they’d stick by each other. Wouldn’t they?   

Without really knowing it the friends had embarked on a joint venture.  With nothing documented, and no company established joining the two friends as shareholders, the law identifies their relationship as a partnership.  Under partnership law both are liable for the debts of the partnership, whether or not they approved them or even knew about them.  So when the new party committed them to a fit-out of the shop premises costing $45,000 but then couldn’t pay, the original business owner was faced with a demand to pay even though she had not been involved in the arrangement in question at all.  As a sole trader she was personally liable.  This not only ended the plans for expansion, it added significantly to her mortgage and regrettably had ended a friendship. 

In this example the business owner was lucky that she could stay operating on-line and start building capital again.  However it goes to show how quickly hard work can be undermined and the financial state of a successful business can change.  This, all because the business owner did not take the important step of reassessing the business structure when expansion was contemplated.  

What could have been done?

If the friends had created a company at the start, with both as shareholders, this situation could have been avoided and their dreams of expansion could have been realised.  A well documented shareholders agreement would have at least required the friend to get the business owners’ consent before entering into the contract for the fit-out.

Further, even if a contract for an expensive fit out had been entered into in the way described, it would have been in the name of the company.  As a result the business owner would have been less likely to personally incur liability for the debt (depending on other circumstances relating to the business). 

Other reasons to review structure

The above example serves to illustrate one way that a review of your business structure can ensure that you are protected as your business expands.  There are also other reasons to reassess it: 

Control

• Who controls the business and is this appropriate in the current market?
• What happens when the market changes?

Clear rules governing relationships

• Is your partnership deed, trust deed or constitution clear?

Taxation

• Are you paying too much?
• Do you need to pay tax?

Ability to easily expand or retract

• Is your existing structure able to cope with further expansion?
• Are joint ventures likely/possible?
• What about injections of capital?

Flexibility

• Is the existing structure able to adapt to changing circumstances?

Succession

• Have you got succession plans in place for your business, especially where the business is a family one.

Get advice

There are a number of options and business structures available.  There are many pros and cons to consider and factors to take into account.  . A regular review will ensure that you have the right structure to meet your ever-changing business needs.

A regular review can also confirm that your existing structure is working well. Sometimes a few enhancements may be required to the existing structure rather than a brand new structure. 

We recommend that reviews be undertaken at least once every three years. 

Taking the time to get this part of your business right can add significantly to your bottom line and ensure the ongoing success of your business.  Not doing so could cost you dearly, losing financially and even friendships.