“I wish I did that at the start.” It’s common to hear tech entrepreneurs uttering these words. They say this upon realizing that it’s difficult to either scale or downsize because they didn’t structure their businesses appropriately. In today’s corporate world, many new technology companies fade into oblivion as soon as they encounter their first tax or legal challenge. Those that manage to overcome these challenges face more significant challenges that even threaten their existence.
These challenges shouldn’t make your technology company a “lemonade stand.” Instead, you should use them to create a legacy of success and a long-lasting legacy. Restructuring your new technology company is the easiest way of countering most of the challenges that you will encounter. Here are three tips for restructuring your new technology company.
1. Establish a Family Trust
It’s common to see tech entrepreneurs holding their companies’ shares personally. As convenient as it is, this doesn’t allow you to split your income for taxation purposes. Likewise, it doesn’t protect your interest in the startup from any personal risk. Establishing a family trust acts as insurance for asset protection.
Often, tax returns and accounts for family trusts are only required when the trusts are receiving income by the sale of shares upon exit or via company dividends. Besides, establishing a family trust when you set up a tech company negates the need to face significant capital gains tax hurdles. Typically, such tax hurdles arise later on when you decide to move the company’s shares into a family trust.
2. Establish an Income Tax Partnership
When there are more than two businesses in a corporate group, tax consolidation is easy. The benefits of forming an income tax consolidation group with your subsidiaries or other companies include:
- Intercompany transactions (including management and licensing fees) will be overlooked for tax purposes, thus lessening your tax burden
- Tax obligations won’t arise when assets get transferred between the companies
- The tax losses of one company will be offset against the profits of the other companies
- The R&D tax incentive will be accessed at the group level. Therefore, it’s highly unlikely that eligible R&D tax expenditure will be missed.
The sooner you establish a tax consolidation group, the better. You’ll be able to access the aforementioned tax benefits as soon as possible, besides enjoying other numerous benefits of tax consolidation.
3. Set Up a Solo 401(k) for Your Company
A self-directed 401(k) is a unique retirement savings account that is only available to up and coming businesses. If you own or run a tech startup, you should take advantage of this account since it allows you to sock away up to $50,000 every year while qualifying for significant tax deductions.
Tax savings shouldn’t be your sole reason for setting up a solo 401(k) for your technology company. From a legal perspective, the money channeled to this account is secure since no one can touch it, including the IRS, bankruptcy, and those who may file lawsuits against your company.
What Are the Risks of Organizational Restructuring?
To effectively restructure your tech company and set it on the path of sustainable growth and profit, there are certain pitfalls that you should be aware of. These include:
- Getting lost in the process
- Establishing objectives and goals that don’t align with your company’s inherent goals
- Confusion over team members’ roles after restructuring
- Overcoming new tax hurdles that might emerge.
You can avoid these challenges by outsourcing the services of tax professionals at Incentax when restructuring your tech company. We use innovative data gathering tools to ensure that you get lucrative tax advantages as you restructure. If you are interested in maximizing your tax savings, contact us today.