There comes a time in every business’ life where it it goes through a period of growth.  Whether it be at the start of the business lifecycle, the middle or perhaps towards the “plateau”.  Generally speaking, a cash surplus is required to help provide for the growth and expansion of the business.  The problem especially for start-up entities, is sourcing funding or cash to enable growth.

The Australian government has several programmes which can be accessed by eligible business to help raise venture capital in addition to other areas of private funding but before a business can think about this, what type of corporate structure works best for them and their future investor?

As a quick refresher, there are four main types of business structure in Australia:

When trying to decide the best corporate structure to set-up, two things are key:  try and structure it at the very beginning; and always think of the exit plan.

Each type of structure and combination of structures will have their own features and benefits, it is always worth seeking specialised advice to help create the best structure which will work commercially.  Whilst the tax consequences of each structure and potential transaction are important, they must never be the driver behind a decision, there must always be a predominantly commercial reason for doing something.

For entities undertaking large scale capital raising for growth, sole trader entities, partnerships and trusts are uncommon vehicles to use.  Companies are far more common given their ability to limit liability, allow for significant increased investment and easy transferability.

For a simple structure the following may be considered:

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This type of structure gives the benefit of having a company at relatively little cost.  It is quite common and on exit, the shares held by the shareholders can be sold to the incoming owners.  Whilst this structure is attractive to investors, this is the simplest and other forms may provide for better long-term growth opportunities.

For slightly larger groups or family run businesses the following structure may be more in line with the goals of the family group:

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In terms of benefits, this structure provides flexibility for distributions of profit around the family group whilst still using an attractive vehicle for potential investors to invest in.

Another alternative may be the following structure depending on what future expansion plans are in place:

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Obviously structures are designed on a case-by-case basis depending on the requirements of the entity.  Not only that, they can be changed over time to better reflect changes in trading conditions.  But ultimately any design considerations or later changes to the structure must be made with regard to the commercial outcome rather than the tax one.

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