In the 3rd and final part of this series we discuss the strategies available to reduce the risk of triggering undesirable tax consequences and ensure the flexible entry and exit of people involved.
Every business should have a Governance Agreement which governs the relationships of the key participants. The agreement can be drafted to incorporate ‘buy/sell’ mechanisms, detailing the procedure for the exit and entry of key persons. This could include forced exit in particular circumstances (for example where a key person dies or becomes incapacitated).
Issuing specific classes of shares
By issuing particular types of shares in a company or units in a Unit Trust, you may lessen the risk of triggering tax consequences and issues associated with removing shareholders. If done properly, the issue of equity:
- will not trigger the value shifting provisions;
- will not result in equity being deemed assessable income;
- can allow for distributions to particular classes of employees and for those distributions to be aligned with individual KPIs;
- will not affect eligibility to small business CGT concessions for existing interest holders;
- can allow for flexible entry and exit of interest holders; and
- allow for particular equity holders to be removed at the discretion of the directors.
Equity in escrow and Call Options
You should also consider issuing equity in escrow, which means that contributors would not receive full title to their equity unless they met certain conditions.
For example, you could consider issuing equity with a requirement that the contributor sell their share or unit back to the owners if they leave the business within a set period of time or if they breached their terms of employment.
Call Options could also be incorporated to allow the owners of the business the ability to buy back equity if certain trigger events occur.
Seeking specific advice
A careless beginning can cause you a world of pain down the track. Choosing the right structure for your IT start-up business and thinking carefully about governance and the way in which people participate in the business are essential considerations.
With proper planning, you can ensure that your business is set up in a tax effective and asset protective manner that is appropriate for its business lifecycle: start-up, growth and sale.
By seeking specific advice from Chamberlains Law Firm, you can put in place the best possible structure and launch your idea in a way that maximises your chances of success.
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