10 ways to mess up your business structure

The business structure you set up with is the foundation of your business.

Here are 10 common ways in which people can mess up their business structures:

Going for the cheapest option.

Being a sole trader is a cheap and quick way to start up a business, but you are also personally liable for anything that goes wrong. If your business goes bankrupt or if a customer makes a claim for damages against your business, your personal assets may be on the line.

Over structuring.

Don’t overcomplicate things from the beginning. Keep it simple but give your business room to grow. Remember that it is much easier to go from a smaller and simpler business structure to a larger and more complicated one than reversing the process. Having a clearer and simpler business structure allows your business the flexibility it needs to grow.

Restricting growth.

If you expect your business to grow significantly do not do things which will restrict its growth. For example, some businesses incorporate as a company, and in the drafting of the shareholders agreement, restrict the number of directors to 2 or 3 directors which does not give much room for the company to grow.

Giving away too much equity.

To attract investors, some businesses offer to their investors, significant amounts of equity but giving up too much equity is never a good idea. Imagine if you and a friend founded a business, and offered up 50% of total shareholdings to some investors who agree to provide you with capital. You and your friend put all time and effort in the business each week, but because you’ve given away 50% in equity, between the two of you, you only get to keep 50% of the profits of the business.

Not having enough capital.

Setting up a business requires resources. Not having enough resources may mean that you are not able to set up your business in the way you’d like or in a way which is beneficial to the business.

Ignoring tax benefits.

Taxes form a huge component of a business’ liabilities and expense and should definitely be taken into account when setting up a business.

Not complying with applicable rules and regulations.

There are significant civil and criminal penalties for non-compliance with rules and regulations. If you are setting up a company, you should also remember that directors have duties under the Corporations Act. Directors who breach their duties can attract fines of over $200,000 and imprisonment.

Forgetting to assess liability risks.

Before you set up your business, you need to properly assess the risks of your business and how much insurance is required. If you have workers, you will need workers compensation, if you provide professional services, you will require professional indemnity insurance.

Being unclear about your vision for your business.

Your business structure goes hand in hand with your vision for your business. You need to have a clear vision for your business before you are able to set up a business structure which can cater for your vision.

Not seeking professional advice.

This is one of the greatest mistakes that you can make. Setting up a business is a very big task. It is important that you get the necessary legal, financial and tax advice before you proceed to ensure that you understand the risks and liabilities which come with setting up and operating your own business.

Looking to set up a business but unsure which business structure is right for you? Contact LegalVision today and speak to one of our business/start-up lawyers. Our lawyers can give you guidance on the pros and cons of each business structure, and assist you in determining which is the most suitable for you and your business.