Structuring a new business.
Hi all, just wondering if anyone on here is savvy when it comes to small business structures?
When the time comes, I'll be happy to sit down formally (i.e. commercially) with someone to set it all up correctly and will need an accountant too, (any recommendations?) but its early days at the moment so just trying to educate myself a little
Without giving too much away, (in case anyone at work sees this), I am a consultant of sorts. My current employer is awarded a contract to produce a set of documents, once the contract is awarded I produce the documents based on information provided from third party consultants and deliver a package to our client for the agreed project price.
My friend and colleague is the same, and together we are currently number 1 & 2 in our organization, delegating work to other employees and project managing each job.
Our 'boss' doesn't do a great deal, contracts are awarded to us based on the quality of work myself and colleague have consistently produced over the years. I deal direct with my clients. In my industry, clients follow individual employees rather than sticking loyally to a particular company. My employer essentially just does the invoicing and pays the office bills. I tender the projects and run them from start to finish.
My "boss" is looking to retire soon and often talks about when the time comes myself and colleague buying the business from him. This is where it gets interesting, as there is no way either of us would be interested as we'd essentially be buying ourselves if that makes sense? The rest of our staff are 'workers' as such, in in some cases are more of a liability to the company than a bonus. The company has very little in the way of assets. We have both said for a few years now that once he decides to sell we'd be going out on our own as sole traders, we would not buy it and there is no market for others to buy it.
The industry is one where you do not need a lot of staff to be profitable, there is plenty of work for a two-person operation, that without the overheads of a medium sized company, would be in a great position.
I've seen a LOT of small companies in my line of work start up, do well, get greedy, expand way too quickly then drop the ball on a big project and end up in administration, (as has happened to my current boss 3 times now).
I am interested in starting something up with the intention of remaining small. As I say, there is a limited marked to build a large company up with the intention of selling a marketable business further down the road but what I am interested in is starting up in a structure that allows us to work in the industry I am familiar with, without the overheads and "deadwood" of a larger operation. I don't mind working hard for a living, I'd just like to see a bit more of what it is I'm working for if you know what I mean?
Assets and outlay:-
As far as initial outlay goes, we would need to purchase computer equipment and two software licenses, (the software license being the most expensive part). These licenses are generally not transferable once purchased unless they are sold as part of a company sale.
Liabilities:-
As far as liabilities are concerned, project values are in the region of $15-$20k per project, which would entail in the region of 100-150 hours say. If a project is WAY under quoted and the hours blow out, then the liability personally is having to work for free to complete the project.
The big liability issue is that the documentation provided is used to produce something, if that documentation is incorrect and proven to be the fault of the new company then the resulting costs could be in the hundreds of thousands. This is the biggest concern for me, in how do we limit that kind of liability?
My current company contacts have a clause which states that any back-charging from clients is limited to a maximum of 10% of the value of the contract to us, but I am not sure how that would stand up in court and would not like to test it.
Structure:-
We would have several projects running at the same time, some will make a profit, some may make a "loss" (in terms of not making as much profit as we'd like) In real terms, there's little scope to make an actual loss as we are producing something from nothing if that makes sense? Our overheads are tiny. We both do the exact same kind of work but may do different hours each week, so another concern in structuring is the fairest way of distributing the profit and the liabilities of the losses. I should point out that, unless we get sued for something, see above, the 'losses' incurred would be in the way of running out of hours on a project so having to work for free to complete it.
I've read around a little on the various forms of structure, Sole Trader, Trust, Partnership and Company and looks like the best way to limit liability issues is to form a Company?
The way a lot of small companies in my industry work is they have two companies. One company purchases all the equipment and the other is the trading company, winning the projects and employing the staff, that way if the trading company fails the assets are somewhat safe in a separate company.
My current thoughts are:-
1 - As we both do the same thing and will need to put in the same start up costs, my thinking is we purchase the software and equipment personally, one set each. That way if we part ways the asset distribution is easy and is not owned by the company? In doing this though, is there a mechanism to be able to claim or depreciate those equipment costs if they are not bought through a company?
2 - We then set up a company where we are 50/50 equal shareholders. This company wins the contracts and rents the office, pays the bills and reports it's profits and losses etc. and limits our personal liability.
3 - We agree on an hourly rate that the company will pay us by periodically drawing down profit (effectively a wage), that way, if we work more or less hours than each other the money taken out of the company in the form of wages is pro-ratered to the work put in. I assume this drawn down would be listed on our individual tax returns? Can you simply draw down profit as you go, or do you actually have to pay yourself a wage? I'm not sure of the tax implications to the company on this one?
4 - Periodically, (annually maybe)? Profits are distributed from the company after company tax is paid, to each of us pro-ratered based on the number of hours worked that year. An agreed amount is left in the company as 'float' to cover 'wages' on future projects that overrun, or have late paid invoices etc. Again, that draw down would be declared on our personal returns.
Does that sounds feasible? Can we purchase the software and hardware personally yet still deduct it on our personal returns?
I think a Partnership maybe easier in terms of filing taxes and reporting etc, and may work in much the same way but I don't think the liability protection would be as good as a company?
Would love to hear some thoughts and suggestions and sorry for the huge post.
Cheers.
Hi all, just wondering if anyone on here is savvy when it comes to small business structures?
When the time comes, I'll be happy to sit down formally (i.e. commercially) with someone to set it all up correctly and will need an accountant too, (any recommendations?) but its early days at the moment so just trying to educate myself a little
Without giving too much away, (in case anyone at work sees this), I am a consultant of sorts. My current employer is awarded a contract to produce a set of documents, once the contract is awarded I produce the documents based on information provided from third party consultants and deliver a package to our client for the agreed project price.
My friend and colleague is the same, and together we are currently number 1 & 2 in our organization, delegating work to other employees and project managing each job.
Our 'boss' doesn't do a great deal, contracts are awarded to us based on the quality of work myself and colleague have consistently produced over the years. I deal direct with my clients. In my industry, clients follow individual employees rather than sticking loyally to a particular company. My employer essentially just does the invoicing and pays the office bills. I tender the projects and run them from start to finish.
My "boss" is looking to retire soon and often talks about when the time comes myself and colleague buying the business from him. This is where it gets interesting, as there is no way either of us would be interested as we'd essentially be buying ourselves if that makes sense? The rest of our staff are 'workers' as such, in in some cases are more of a liability to the company than a bonus. The company has very little in the way of assets. We have both said for a few years now that once he decides to sell we'd be going out on our own as sole traders, we would not buy it and there is no market for others to buy it.
The industry is one where you do not need a lot of staff to be profitable, there is plenty of work for a two-person operation, that without the overheads of a medium sized company, would be in a great position.
I've seen a LOT of small companies in my line of work start up, do well, get greedy, expand way too quickly then drop the ball on a big project and end up in administration, (as has happened to my current boss 3 times now).
I am interested in starting something up with the intention of remaining small. As I say, there is a limited marked to build a large company up with the intention of selling a marketable business further down the road but what I am interested in is starting up in a structure that allows us to work in the industry I am familiar with, without the overheads and "deadwood" of a larger operation. I don't mind working hard for a living, I'd just like to see a bit more of what it is I'm working for if you know what I mean?
Assets and outlay:-
As far as initial outlay goes, we would need to purchase computer equipment and two software licenses, (the software license being the most expensive part). These licenses are generally not transferable once purchased unless they are sold as part of a company sale.
Liabilities:-
As far as liabilities are concerned, project values are in the region of $15-$20k per project, which would entail in the region of 100-150 hours say. If a project is WAY under quoted and the hours blow out, then the liability personally is having to work for free to complete the project.
The big liability issue is that the documentation provided is used to produce something, if that documentation is incorrect and proven to be the fault of the new company then the resulting costs could be in the hundreds of thousands. This is the biggest concern for me, in how do we limit that kind of liability?
My current company contacts have a clause which states that any back-charging from clients is limited to a maximum of 10% of the value of the contract to us, but I am not sure how that would stand up in court and would not like to test it.
Structure:-
We would have several projects running at the same time, some will make a profit, some may make a "loss" (in terms of not making as much profit as we'd like) In real terms, there's little scope to make an actual loss as we are producing something from nothing if that makes sense? Our overheads are tiny. We both do the exact same kind of work but may do different hours each week, so another concern in structuring is the fairest way of distributing the profit and the liabilities of the losses. I should point out that, unless we get sued for something, see above, the 'losses' incurred would be in the way of running out of hours on a project so having to work for free to complete it.
I've read around a little on the various forms of structure, Sole Trader, Trust, Partnership and Company and looks like the best way to limit liability issues is to form a Company?
The way a lot of small companies in my industry work is they have two companies. One company purchases all the equipment and the other is the trading company, winning the projects and employing the staff, that way if the trading company fails the assets are somewhat safe in a separate company.
My current thoughts are:-
1 - As we both do the same thing and will need to put in the same start up costs, my thinking is we purchase the software and equipment personally, one set each. That way if we part ways the asset distribution is easy and is not owned by the company? In doing this though, is there a mechanism to be able to claim or depreciate those equipment costs if they are not bought through a company?
2 - We then set up a company where we are 50/50 equal shareholders. This company wins the contracts and rents the office, pays the bills and reports it's profits and losses etc. and limits our personal liability.
3 - We agree on an hourly rate that the company will pay us by periodically drawing down profit (effectively a wage), that way, if we work more or less hours than each other the money taken out of the company in the form of wages is pro-ratered to the work put in. I assume this drawn down would be listed on our individual tax returns? Can you simply draw down profit as you go, or do you actually have to pay yourself a wage? I'm not sure of the tax implications to the company on this one?
4 - Periodically, (annually maybe)? Profits are distributed from the company after company tax is paid, to each of us pro-ratered based on the number of hours worked that year. An agreed amount is left in the company as 'float' to cover 'wages' on future projects that overrun, or have late paid invoices etc. Again, that draw down would be declared on our personal returns.
Does that sounds feasible? Can we purchase the software and hardware personally yet still deduct it on our personal returns?
I think a Partnership maybe easier in terms of filing taxes and reporting etc, and may work in much the same way but I don't think the liability protection would be as good as a company?
Would love to hear some thoughts and suggestions and sorry for the huge post.
Cheers.