Reading time: 3 minutes

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.

Webinars

How Franchisors Can Avoid Misleading and Deceptive Conduct

Wednesday 18 May | 11:00 - 11:45am

Online
Ensure your franchise is not accused of misleading and deceptive conduct. Register for our free webinar today.
Register Now

New Kid on the Blockchain: Understanding the Proposed Laws for Crypto, NFT and Blockchain Projects

Wednesday 25 May | 10:00 - 10:45am

Online
If you operate in the crypto space, ensure you understand the Federal Government’s proposed licensing and regulation changes. Register today for our free webinar.
Register Now

How to Expand Your Business Into a Franchise

Thursday 26 May | 11:00 - 11:45am

Online
Drive rapid growth in your business by turning it into a franchise. To learn how, join our free webinar. Register today.
Register Now

Day in Court: What Happens When Your Business Goes to Court

Thursday 2 June | 11:00 - 11:45am

Online
If your business is going to court, then you need to understand the process. Our free webinar will explain.
Register Now

How to Manage a Construction Dispute

Thursday 9 June | 11:00 - 11:45am

Online
Protect your construction firm from disputes. To understand how, join our free webinar.
Register Now

Startup Financing: Venture Debt 101

Thursday 23 June | 11:00 - 11:45am

Online
Learn how venture debt can help take your startup to the next level. Register for our free webinar today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer