We assist a lot of Australian startups, and as such have seen all sorts of needlessly complicated business structures. There’s a reason for this. More complex structures are more expensive to set up, and the professional advisors who recommend them will therefore generally get a short term revenue pop. Unfortunately, it means that many startups and small businesses overpay for their initial structuring work, and end up with overly complex structures that are not fit for purpose. Below, we set out the three most common ways to overcomplicate your business structure, and what you can simplify.
Over Complication 1: Lots of Companies!
One of the more common issues we see is businesses that have four or five companies in their corporate structure. Generally, there’s no reason to have more than two companies in your corporate structure unless you’re running a large business. The most sensible structure is to have a holding company that holds the major assets (IP, cash, etc.), and an operating company that contracts with suppliers and customers. We commonly see businesses that have set up a company to own IP, a company to contract with suppliers and hold shares, a company to contract with customers, etc. In the majority of situations, this overengineering just wastes time and money. There’s the initial cost of setting up all of the companies, but more importantly, you’ll have to deal with the ongoing compliance and accounting obligations for each entity.
Over Complication 2: Trust Structures
I’m not an accountant but if you’re ever planning on selling your business, then running it through a unit trust or discretionary trust structure makes no sense. By all means, ensure that you own your shares in your business through a discretionary trust, both for asset protection and tax streaming purposes, but don’t actually run your business through a unit trust structure. In the past, I’ve seen structures set up which include three or four unit trusts, with cross ownership to boot. If you take some time to understand why such a structure has been set up, it’s often very difficult to get to the bottom of it.
Use this as a rule of thumb: if your lawyer or accountant can’t explain to you why a proposed structure makes sense, then they don’t know themselves.
Over Complication 3: Numerous Share Classes
It often makes sense to have a couple of classes of shares in a company, particularly if you’ve raised capital from a Venture Capital fund, but I’ve seen proposed share class structures with five or more classes. There’s just no need for this for 99% of companies. The simpler your share class structure is, the easier it will be to determine voting rights, and company governance issues. It will also be easier for you to raise capital (without having to explain an overly complex share structure to potential investors).
Keep your business structure simple! You should focus your effort on running your business, not dealing with overly complex structuring issues. If you need assistance with a company structure for your startup, or have any questions about which best suits your needs, get in touch.