What's the best structure? Episode 3 - Selling your business

The company is usually the most effective structure to obtain funding and introduce new investors, but there are negatives such as no CGT discount. Learn more.

Tax Snap available from Resources tab.

Next episode: Episode 4 - Cost and complexity

Date published: 1 September 2021

___________________

TRANSCRIPT

So the next category, here is the ability to sell your business. And the consequences of doing that. So let's go through this quickly. 

Sole trader 00:08

As a sole trader, you can sell your business. No problem. Sell it. You get the small business capital gains concessions. You get the individual capital gains concessions. Fine. No problem. Perfect. Whatever the gain ends up being, you paid tax at your marginal rate. 

Partnership 00:22

As a partnership, exact same, except to split as your partner, whatever your percentage is.

Company 00:28

As a company, however, you have a couple of options. Essentially you have the option one, selling the business from the company. 

Selling the business 00:35

So you own a company that runs a business, that company sells that business to someone else, but you still own that company. Yeah. In that instance, the company pays tax on any gain. It doesn't get the individual concessions, but it can get the small business concessions. And then what you're left with is shares in a company that holds cash. And maybe if you have the assets and you got to figure out what to do with that.

Selling the shares 00:56

Yeah. The other option is you sell the shares in the company. Yes. So you sell those shares to somebody else, . And then you individually make a gain and you get the individual concessions. Yeah. Yeah. But that is a rare thing to do because selling your company or buying a company, you can buy other people's problems and their dirty laundry.

Yeah. So, yeah, so, but that is really powerful when it comes to, if you have a business that you're growing, you want to take on partners and investment, the company is the entity to do that. Yeah. So why is that Tim? Well, I mean, it's just so, it's so flexible to allow equity raising, and this is why companies came about.

Essentially you can take on money from an investor into a company and you can issue in return a share of the value or the ownership of that company. Yep. So essentially what was giving you, there is flexibility to take on partners, investors, angel investors. Or even if, if you just wanted to sell half your company and you own a hundred shares you can just sell 50 of those. You don't have to sell the whole thing. Yeah. 

So there's a couple options. You can get more money into the company by raising equity. Yeah. Or you could sell half of your shares to get more money to yourself. There's so much options. There is. And so that may not be something that all people in business are looking at doing. 

So you really do need to think about your exit planning business if selling your business as a whole is your only option, or if taking on business partners is another option. And even if, I mean, if you're a startup and you need to raise funding to get your business up and running well, then a company is going to be what you need to set up in. Not a trust.

Trust 2:38

So the trust on the other side of the coin and especially a discretionary trust, if you go in for that tax flexibility has none of that fixed ownership right. That's right. You're not going to be able to really take on partners because at the end of the day, there's no value to them. You can, if you're controlling the way that income is distributed, then you can just tell them, well, yeah, you're a partner of the trust, but I don't feel like distributing income to you this year.

Yeah. Yeah. So it is, it is a difficult thing to have a discretionary trust. And sell your ownership interest in that trust as a share. So I I've come across it once recently where there was two people who shouldn't have been set up this way, who were in a discretionary trust, separate they weren't family members. And one of them didn't want it. Like one of them wanted to sell their part of the business to the other. But really they're not selling anything. You don't have shares. You don't have, like, you might own shares in a trustee company, but that company has no value. You're selling the right to receive profits.

 So that's what the capital gains calculation ended up being is that you were selling a right. It wasn't even a right. It was, it was more beneficial interest in perhaps maybe getting income. It was, I had to call in some tax lawyer advice on this. It's difficult process. 

So you can sell your business though. You can, if you get to just sell it as a whole, yeah, that's fine. There's no problem at all with that. Yeah. And you get all of the individual and small business concessions that you'd get as a sole trader or a partnership. 

As a matter of fact, if you're going to sell your business as a whole, it's going to be better in a trust because you can still access the capital gains tax concessions. Correct. Whereas in a company you can't. Right. So it could actually be better in, in circumstances where you just imagine you reach a point, you're going to sell the entire business to have it in a trust. 

Then there's different types of trusts. So the unit trust has its own complications. Yeah. But not a lot of people set up in a trust. So unit trust does give you the ability to so units in the same way you would sell shares. So there's a little bit more flexibility there. But as we said before, it doesn't have as much flexibility around tax planning and some of the other things. So there's a trade-off. there is also some problems around stamp duties and land stuff. I won't go into that today.