Geoff Hurst, one of the Directors here at Accounted4, was recently interviewed by Chris Sheedy from Acuity Magazine on the importance of getting the structure of a family business right from the start.
Full digital article by Chris below.
Establishing the correct structure for a family business will prevent problems down the track.
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Multiple factors, including the purpose of a family business, will determine which business structure is most appropriate.
Customising the structure of a family business with trusts, for example, is possible but can be complex to execute.
Accountants play a vital role in ensuring family businesses are correctly set up in the first place, but are also regularly reviewed.
In the excitement of starting a new family business, the question of what business structure to use may seem like a compliance tick box, rather than a strategic decision. However, operating as a sole trader, partnership, company, or something more complex can have important ramifications for tax, business funding, exit strategies and more.
A conversation with a family business owner about a suitable business structure is a complex one that requires much more information than size and type of business, says Geoff Hurst CA, director of Accounted4 in Cambridge, New Zealand.
“Of course, you do need to establish the full background of the business – the business type, the industry and their intentions moving forward in terms of growth and expansion,” Hurst says, “but it’s also vital to develop a clear picture of the personal side.”
That includes the previous business experience of the people involved, their intentions around bringing children into the business, what they hope to achieve in terms of lifestyle, what they enjoy doing in their lives and the purpose of the business.
Byron Leong, partner, family and relationship law at Lander & Rogers, agrees this is a vital ingredient in the recipe for structural success.
“You need to have a very good understanding of what the core business is, where the individuals came from and what’s their business background,” Leong says.
“A lot of people in business come from humble beginnings, so I think it’s really important to understand the roots of a family. That historical understanding helps define their hopes and dreams.”
Discussions around family business structure are becoming more relevant and regular in Australia, Leong says, as we play catch-up with territories such as the US and Europe that have longer business histories.
More generations in business, as well as affluence among the baby boomer generation and new wealth being created by younger entrepreneurs in ventures like tech startups, means there is increasing interest in the establishment and maintenance of family business structures in Australia and New Zealand.
The PwC Global Family Business Survey 2023: Australian findings says 85% of family businesses expect to grow in the next two years, with 28% expecting to grow “quickly and aggressively”. Moreover, 80% said protecting their business as an important family asset was their top priority. And, importantly, 85% said they have a clear company purpose.
Knowing that purpose assists greatly in getting the structure right.
Risk is a major factor
When deciding between sole trader, partnership or company structures, the potential business risks involved are key factors to consider, Hurst says.
“One part of that discussion comes down to risk and protection of your personal belongings and assets,” he says. “The company structure is vital if you’re wanting to maintain a separation between business and personal assets.”
Company structures also offer advantages in terms of growth options, allowing investors to buy into the business, and even credibility.
“You’re having to provide a higher level of reporting,” Hurst says. “For investors, suppliers or banks, the company structure offers greater confidence.”
Shaping a company correctly
Within a company framework there is great opportunity to customise the structure to suit each business and family’s unique needs, Leong says.
“To add a greater risk management tool, it can help to use trusts within the corporate structure or independently,” he says. “It would be usual that you would have a trust set up and you would have a corporate trustee for that particular entity. You can then easily set up other companies to be used as what we call corporate beneficiaries to filter income, and create greater business and tax effectiveness. This is getting into the specialist realm of the accountant.”
There are various types of trusts, such as:
Family discretionary trusts, which define in the trust deed the specific individuals that assets will be transferred to, as well as the timing of those transfers.
Unit trusts, which hold assets for the benefit of unit holders and distribute assets according to how many units each individual holds.
“If someone wants to import tea, you might set up a company and trust for that, then you might have another one for distributing the tea and another one for doing retail,” Leong says. “It can be quite complex. So, best practice would be if a family group surrounds itself with very good advisers, is very clear on its objective and reviews its set-up on a yearly basis.”
What can go wrong?
What happens if the owner of a family business passes that business on to their three children, but none of the children want any involvement? Where does that leave the business, and its staff and stakeholders?
How does the owner of a family business sell the company and its assets in the most tax-effective manner?
What’s the next step if there’s a knowledgeable matriarch in charge of the family business who suffers a stroke?
There are any number of eventualities that family business owners can and should prepare for. This is why purpose – or “hopes and dreams” – is vital to establish upfront, Leong says.
“Changing structures can be difficult and costly,” he says. “But if you have worked hard and built a business worth $50 million, for example, and you want to pass that on to your children, if there are poor relationships between the children, the business or investments might not survive in the future.
“Most family businesses are not built to just disappear; they’re built to serve a purpose. The right structure can protect and promote that purpose.”
