There are a hundred and one things budding entrepreneurs and business owners need to consider when setting up or running a business. Many of these factors have important legal and tax consequences.
One very important way of categorising the business that is often given too little consideration is whether it will be run as a ‘lifestyle business’ that exists primarily to provide an income for the business owner, or a ‘growth business’ with a focus on rapid growth usually with the ultimate aim of selling the business as a going concern in the future.
Differences Between Lifestyle and Growth Businesses
While both formats can be very profitable for business owners, there are some major differences in the way they tend to operate and the way they are funded.
Businesses that are run for rapid growth are typically those at the forefront of their relevant market or niche, they tend to innovate through new technology, aiming to stay one step ahead of customer demand and market needs and they will usually be involved in the creation of new products and services that shape the industry.
Lifestyle businesses, on the other hand, exist largely to provide ‘a lifestyle’ for the business owner. The owner will tend to withdraw large sums from the profit of the business as dividends and/or a large salary rather than re-investing it in the business in the way that a growth business would.
It should be noted that the distinction is not always clear cut and can certainly blur over time as businesses develop and priorities change.
The Bottom Line
The bottom line is that without re-investment in the business it is unlikely to grow. However, growth is not always the be-all-and-end-all.
Large profits can be made by lifestyle businesses but there are some important implications that lifestyle business owners should consider. For instance, it is important for lifestyle business owners to get professional advice on the tax implications of withdrawing large sums from profits to ensure they are maximising their tax position to the best advantage. Whether this is achieved through salaries, dividends or other benefits; all have differing tax liabilities.
A business operating for growth will need to consider future tax implications that will arise upon the sale of the business as the sale proceeds may attract significant capital gains tax liabilities. Further elements of an exit strategy will also need to be covered which may require a shareholder agreement if there are other investors.
Investment Implications
There are important investment implications too. A lifestyle business ideally needs to minimize reliance on other investors who are unlikely to be happy with a business strategy to fuel the owner’s lifestyle rather than the future interests of the company.
Growth businesses therefore tend to be more appealing to investors. If a business is likely to need outside investment now or in the future, being able to demonstrate a passion for the industry and future growth to investors rather than just running the business as a means to a lifestyle, will become more important for owners.
Comment
Ultimately, whether your business will be a lifestyle or a growth business will depend on your ambitions and reasons for setting up in business. The way the business is structured, managed and exited has important legal and tax implications that should be considered right from the start. For more information please contact James Crichton via e-mail jcrichton@rollingsons.co.uk or by telephone on 0207 611 4848.
