Business Structures 102: Tips for Existing Business Owners
In January 2022 we posted an article titled Business Structures 101. This is the follow-on to that article and is aimed at existing business owners who are thinking about starting a second (and separate) business (Second Business). Although we will cover some different content here to Business Structures 101, we recommend reading these articles in sequential order, so if you haven’t already checked it out we encourage you to have a quick read: Business Structures 101 and then come right back for the follow-on.
The quickest and easiest option when setting up a Second Business is to use the entity you already have and simply register a new business name and start operating the Second Business. In some circumstances that can work, but making this decision still requires taking some time to consider whether it is really the best option in your specific circumstances.
The following are some key issues you should consider:
Crossover
You should consider how your current business (First Business) will be impacted if anything goes wrong with the Second Business.
This is quite a big risk to consider, because you want to ensure that appropriate steps are taken to protect the First Business if something happens with the Second Business (and vice versa). For example, imagine Scenario 1 where a disenfranchised former employee of the Second Business decides to bring a claim, then the claim is brought against the controlling entity. This scenario exposes the assets of both the First and the Second Businesses as they are all regarded as the assets of the controlling entity. See Figure 1 below.
Figure 1: Scenario 1
Alternatively, in Scenario 2, you have set up the Second Business under a separate controlling entity (refer to Figure 2). Here, should a claim or action be brought against the Second Business, the assets and money held by that entity alone would be at risk, and (all going to plan) the First Business could continue to operate totally unaffected by that claim or action.
Figure 2: Scenario 2
In short, in Scenario 2, you might lose the Second Business, but you would still have the First Business to fall back on. Alternatively, in Scenario 1, both businesses are impacted, and you may be required to sell the First Business (or at least some assets in it) to meet the claim.
Saleability
One business is a lot of hard work, let alone two. It’s highly likely that at some point you may want to sell one of the two businesses or bring someone in at an ownership level to help run it.
Consider again Scenario 1, if both businesses are operating under the same entity, it may be difficult to ‘uncouple’ them for a sale. If you intend to sell the whole of the business, then this is straightforward. However, if you want to sell only a half share of the Second Business, then the process of disentangling the Second Business from the First Business may be time consuming and potentially costly. Had you set up a new entity at the outset, as in Scenario 2, selling a half share of your business is a relatively simple process of documenting a share sale agreement in comparison.
Tax Planning
You should also seek accounting/tax advice, again based on your specific circumstances. There may be some added tax benefits that you can obtain by separating the Businesses into different entities.
Ultimately, it’s important to consider your own risk profile and how opening a Second Business will affect your First Business, and more importantly you as an individual. Knowing your business entity and structure is one of the most crucial parts of setting up your business and is very important to consider when adding to your business portfolio.
NOTE: The Contents of this Article are general in nature and are not intended as legal advice.
Enterprise Legal offers a free Business Health Check, in which we arrange a time to meet with you in-person or by phone/Zoom to assess your business needs.
We will work closely with you, your accountant and other financial advisors to give you all the relevant information and discuss the best way to move forward. We can even create your new entity, amend your existing structure, or draft supporting entity documents to support your structure (such as company constitutions, association rules, shareholder’s agreements etc).
Contact the Business Law Team today or book in for your Free Business Health Check:
