Introduction
One of the first decisions you will make when starting a business is choosing a legal structure. Many businesses begin as sole traders or small companies because these structures are simple, cost-effective and suitable for early stage operations.
However, as your business grows, your legal needs will change. The structure that worked at the beginning of your business journey may no longer provide the protection, flexibility or commercial advantages required to support your next stage of growth.
As your business grows, it is important to review your legal structure to ensure that your business is positioned for expansion while protecting you and your assets while positioning your business for future opportunities.
Key article takeaways
- The business structure you choose at the start may not remain suitable as your business grows.
- Growth milestones such as higher profits, employees, new owners, investors, larger contracts, valuable assets or sale plans should prompt a structure review.
- Your structure can affect personal liability, asset protection, tax obligations, ownership, decision-making, succession and sale options.
- Moving from a sole trader to a company or reviewing company ownership arrangements may provide greater flexibility, depending on the circumstances.
- Legal and accounting advice can help business owners update their structure before issues become urgent or costly.
Why your legal structure matters
The type of business structure you use will impact several areas of your business including:
- personal liability;
- asset protection;
- tax obligations;
- ownership and decision-making;
- bringing in investors or new owners;
- succession planning; and
- the ability to sell or transfer the business.
A structure that is appropriate for a small business with one owner may no longer be suitable once the business has employees, multiple owners, significant assets or plans for further growth and investment.
Reviewing your structure
There is no single point at which every business must review its legal structure. However, there are certain growth milestones that should prompt a review.
Your business becomes more profitable
As the business’ revenue and profitability increase, the tax implications, asset protection and personal liability considerations of your current structure may need to be reassessed.
For example, while a sole trader structure may be suitable when a business is starting out, increasing profits may prompt business owners to consider whether operating through a company or another structure would provide greater flexibility and protection, depending on the circumstances.
You are bringing in partners or investors
If ownership of your business is changing, the existing structure may no longer reflect the commercial reality of the business.
Before introducing new owners or investors, businesses should consider:
- how ownership interests will be recorded;
- how decisions will be made;
- how profits are distributed;
- what happens if an owner wants to exit; and
- how disputes will be managed.
A shareholders agreement or other ownership agreement can help establish clear expectations between parties to avoid disputes as the business grows.
LawBase can assist with preparing a shareholders agreement. LawBase specifically offers a shareholders agreement legal package to assist business owners.
Your personal assets become exposed
As a business grows, so do its potential liabilities. Entering into contracts, employing staff, holding valuable assets or operating in certain industries may increase the importance of separating your personal assets from your business assets.
Moving to a more appropriate structure may help reduce unnecessary personal exposure to business liabilities.
You are planning to sell or expand
If you are preparing for an investment, an acquisition, franchising or expansion into new markets, having the wrong structure may cause limitations.
Potential buyers and investors often look closely at a business’ legal structure, ownership arrangements, contracts and compliance obligations as part of their due diligence.
Having a clear and suitable structure can provide greater certainty and help reduce issues during negotiations.
Our team can help with you a business sale, or business purchase.
Common restructuring options
The right structure will depend on the circumstances and objectives of each business. However, some common restructuring options may include:
- Moving from a sole trader to a company. This may provide greater asset protection and flexibility as the business grows.
- Reviewing company ownership arrangements. Companies with multiple shareholders should consider whether their constitution and/or shareholders agreement continue to reflect the owners’ intentions.
- Considering trusts or other structures. Some businesses may benefit from alternative structures depending on their commercial objectives, asset protection considerations and tax position.
Businesses should obtain appropriate accounting and tax advice when considering these structures.
Conclusion
Your business structure should evolve as your business does.
A common mistake businesses make is only reviewing their structure after an issue arises. A proactive review allows business owners to identify risks early and make changes before they become urgent or costly.
The structure that supported your business at the outset may not provide the same level of protection, flexibility or commercial suitability as your business grows.
Additional resources
Frequently asked questions
You should review your business structure when your business changes in a meaningful way.
This may include becoming more profitable, hiring employees, entering larger contracts, taking on debt, bringing in partners or investors, holding valuable assets, expanding into new markets or preparing to sell the business.
The structure that worked when the business started may not provide the same level of protection, flexibility or commercial suitability as the business grows.
Your business structure can affect personal liability, asset protection, tax obligations, ownership, decision-making, succession planning, investor readiness and the ability to sell or transfer the business.
As a business becomes more complex, the legal and commercial risks usually increase.
Reviewing your structure helps ensure the business is set up to support growth while managing avoidable risks.
A sole trader may consider changing to a company structure when the business grows, becomes more profitable, takes on greater risk, hires employees, enters larger contracts, brings in investors or prepares for sale.
A company structure may provide greater flexibility and a layer of asset protection, depending on the circumstances. However, it also comes with additional administration, compliance and director obligations.
Before making the change, business owners should obtain legal and accounting advice to understand the legal, tax and commercial consequences.
Before bringing in partners or investors, you should consider how ownership interests will be recorded, how decisions will be made, how profits will be distributed, what happens if an owner wants to exit and how disputes will be managed.
You should also consider whether your current structure is suitable for investment and whether your ownership arrangements are properly documented.
A shareholders agreement can help establish clear expectations between owners and reduce the risk of disputes as the business grows.
Yes. Potential buyers and investors often review a business’s structure, ownership arrangements, contracts, assets and compliance obligations during due diligence.
If the structure is unclear, unsuitable or poorly documented, it can create uncertainty and may lead to delays, additional negotiations or reduced buyer confidence.
Reviewing your structure before going to market can help identify issues early and better prepare the business for sale.
Yes, restructuring can have tax consequences.
Changing from one structure to another may involve transferring assets, changing ownership, updating registrations, creating new entities or reviewing existing contracts. These steps can have tax, accounting and legal implications.
Business owners should obtain accounting and tax advice, as well as legal advice, before restructuring.
Yes. LawBase can help business owners review the legal implications of their current structure and identify documents or arrangements that may need updating.
Depending on your circumstances, this may include reviewing company ownership arrangements, shareholders agreements, partnership agreements, contracts, employment documents, intellectual property arrangements and sale or investment readiness.
If your business has grown or changed since it was first established, LawBase can help you understand whether your legal structure still supports your goals.
Schedule a Free CallThe information in this article is for general purposes only and you should obtain professional advice relevant to your specific circumstances.
Review Your Structure Before Issues Arise
As your business grows, your legal structure should continue to support your goals, protect your interests and prepare you for future opportunities.
LawBase can help business owners review their structure, ownership arrangements and key legal documents so the business is better positioned for growth, investment or sale.
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