Getting the right business structure is a bit of art, and a bit of science. It comes down to balancing several, often competing, objectives.
When asked what structure to use, we like to apply several key principles and ‘rules of thumb’ to get the right answer.
Keep risks separate from wealth
The first general principle is to always keep a separation between risk and wealth.
You should choose how much you put on the table in the form of resources at risk in your business venture.
If you don’t maintain a separation between risk and assets, then you will by default risk everything for potentially little gain.
This separation can start simple, like having one person hold your home and the other run the business. The home owner may even lend seed capital to the business person and take security over any business assets (like IP or stock).
Next you can add a company with limited liability, to separate business risk in the company from the wealth in the hands of the owners. The directors are still exposed to a higher risk than the shareholders, so you may want to combine this with the first strategy, i.e. have one person hold the shares and your home, and the straw-person acts as the director.
Further down the track, you can separate business risks in one entity from business assets (or wealth) in another. We call this a dual-entity structure. The business asset holding entity makes the assets available to the business risk entity. You need to consider PPSR registrations to ensure that this strategy actually works.
Finally, as your business grows in value and becomes an asset in itself, you can add a trust to get two-way risk quarantining, so:
- Your personal wealth is protected from your business risk; and
- Your business wealth is protected from your personal risk.