Can you establish your startup on your own?

Can you establish your startup on your own?

Background

I get it. Startup life is hard. Your entire day is a balancing exercise, and you try to accomplish as much as you can with limited resources. Who has time, let alone the money, to seek professional advice when there are a hundred other things to do.

It’s that “I’m too busy to think about this right now” attitude that leaves many small business owners with a nagging feeling in the back of their mind: have I done things the right way? Should I have done things differently? What if this comes back to bite me?

One of my clients recently came to see me about taking on some external funding for their startup. In just 18 months, their unique services based business had boomed. They were now ready for some external funding – a cash injection that valued their business at $4,000,000. A great result in such a short space of time. So, what’s the issue you ask? Let me explain.

The Issue

When thee established the business, it was two blokes and a great idea. Both had a “day job”, which they were not willing to part with just yet. Whilst they thought they were onto a brilliant idea, they had no way of knowing whether the market would agree, and neither had the resources to spend on full blown professional advice. So, one of them jumped online, found a “do it yourself” company registration service and had a company registered with himself and his business partner as the directors and sole shareholders. Easy, they were up and running in less than 24 hours for a few hundred dollars plus ASIC fees.

Fast forward 18 months, and they almost handed half the proceeds of their success to the ATO on account of capital gains tax – a generous but unnecessary donation to the Australian taxpayer. The issue in this case was twofold: (1) they were about to sell some of their shares to the incoming investor, giving rise to a significant capital gain; and (2) the shares were held in their own names (as opposed to a family or discretionary trust), meaning that any capital gain now, or in the future, would be taxed at the individuals’ tax rate (which at the amounts we are talking about, would be the highest marginal rate of 45%).

The Solution

Luckily, we became involved early enough to give us a chance to intervene. Working closely with the business’ accountant, we effected a restructure and applied certain available small business capital gains rollovers. From there, the incoming shareholder invested in the company itself by subscribing for shares, avoiding a divestment altogether and avoiding any capital gains consequences from this transaction.

Key takeaway

What’s the point you ask, if the issue was able to be fixed? It’s simply this: had the client sought advice as to the business structure at the outset, the total establishment costs would have been little more than what they actually paid – maybe in the order of a few hundred dollars more. The fix? It cost them several thousand dollars to implement.

If you are establishing or running a small business or startup, ask yourself whether doing it yourself will end up costing you more in the future. If in doubt, get in touch.