Do you have the optimal business structure?

Do you have the optimal business structure?

All family business owners should review their structure to determine whether it is still ‘fit for purpose’ and meets their current objectives. When was the last time you considered this? 

Depending on your situation, you may need to ensure that your structure is tax efficient for a future disposal or for transferring to the next generation. Sometimes it can be necessary to restructure the business to address changing circumstances.

For example, a family business often reaches the stage where they wish to diversify and invest outside of their successful core trading business. This is often combined with a desire to pass on value to the next generation to enable them to make their own investments and manage their own businesses, as part of estate planning considerations.

A profitable trading business can generate significant surplus cash above what is required for funding working capital and lifestyle requirements. If these funds were paid out as dividends this would give rise to an income tax charge at rates up to 38.1%. To address this, often businesses accrue large cash balances, or invest in non-trading assets such as residential property. However, retaining the funds within the company in this way can have several drawbacks.

Surplus cash or non-trading assets held in a trading company risks the availability of tax reliefs, such as entrepreneurs’ relief on a future disposal, increasing the tax rate from 10% to 20%, and relief from inheritance tax when passing the business down to future generations, increasing the tax rate from 0% up to 40%. 

Holding surplus cash in the business can also adversely impact working capital management and negotiations with other parties such as customers, suppliers and lenders.

Each family business will need to weigh up their strategy and plans for the future of their business and what they are trying to achieve from their surplus funds. There is not ‘one answer’ that fits all and the solution for each family will depend on their commercial and tax circumstances.  

In some circumstances, it may be appropriate to make investments within the existing corporate structure, whilst keeping it separate from the existing trading business. In other circumstances it may be possible to put in place a structure which will allow surplus funds to be tax efficiently transferred to another corporate structure where new investments can be made. This can often be an opportunity for transferring value to the next generation, whilst control is retained by the older generation if that is desired.

In assessing the appropriate structure, it will be necessary to consider all the tax implications, including planning for a potential disposal of the trading business, as well as managing inheritance tax exposures. 

We specialise in advising our clients on business structure and succession. If you would like to know more about how we can assist with achieving your commercial and personal objectives, please get in touch with your usual Creaseys contact on 01892 546546.