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Money / Financial management

Going bust! Company structure pitfalls

The company structure offers some excellent benefits and is an appropriate structure in many instances. But not all.

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A recent ASIC report indicated that small and medium enterprises (SMEs) formed the majority of corporate insolvencies.

We work with soloists and people in micro business daily, and we see the human casualties behind the statistics.

The three main causes for company failure are:

  • Poor strategic management of business
  • Inadequate cash flow or high cash use
  • Poor financial control, including lack of records

Before you decide to establish a company structure, get some advice about the pros and cons of doing so, and make sure you know your obligations as a director, secretary or officeholder.

Indeed, if you can’t find the time or money to take such advice, this may be a good indicator that the company structure is not the right one for you! Here are some other reasons why you may not choose a company structure:

A company structure can be costly

A company structure is relatively more expensive to establish, maintain and
close. If your business is very small, low risk, or its future is uncertain, then perhaps a company is not the right structure for you.

"We work with soloists and people in micro business daily, and we see the human casualties behind the statistics."

You have more obligations

A company structure creates relatively more obligations, and often there is the need for specific professional advice over and above what you’d require for other structures. If you can’t justify the additional and ongoing expense for this advice, then re-think the use of a company.

You can’t simply walk away from a company

Just as setting up a company requires effort and expenditure, there are typically costs and procedural requirements associated with ending it.

Want more articles like this? Check out the financial management section.

You can have legal problems

If you don’t manage your company properly, you could be breaking the law. You might also lose some of the main benefits typically associated with the company structure.

What to do if you think your company is in trouble

If you think your company could be in financial or other trouble, or if your company has started winding up, you should seek legal advice as to your obligations and responsibilities.

As a soloist or micro business owner you may find that a company structure is the most beneficial for you, but be aware that there are some pitfalls. Consider your options carefully and always get expert advice.

If you have a company structure, what are your experiences? Leave a comment below.

Adam Dimac

holds a bachelor of laws with honours and is an Assistant Adviser with Avenue Solutions.

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