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As your business grows, you may be thinking about changing your business structure. For example, you might want to move from being a sole trader to operating under a company structure.
Changing business structures will significantly impact the way your business operates. But, when done right, it can bring many long-term benefits.
We often talk about business structures as being akin to the foundational frame of a house. Each structure has different reporting requirements, so it’s important that you understand what obligations apply to your business type. You can read more about the importance of choosing the right business structure here.
Why Would I Need To Change My Business Structure?
Often, one of the first changes a business makes when it expands is its business structure. This is especially true for sole traders who are looking to take on a partner or register as a company.
However, business growth is not the only reason you may seek to change your business structure. Other common reasons include:
- Changes in ownership: If you buy an existing business, you may want to change the business structure to suit your own business ambitions.
- Changes to your business strategy: You may look to switch up your business structure if you’ve changed product functions or service offerings, or if you’re looking to expand to overseas markets.
- Financial or operational concerns: Restructuring the business may help to improve cash flow or profitability, as well as the efficiency of internal operations.
Ultimately, choosing your new business structure will depend on what your business needs. Some common business structure changes are explained below.
Changing From A Sole Trader To A Company Structure
If your business has outgrown your sole trader business structure, you may be considering setting up a company. When you set up a company, you create a legal entity that is separate from yourself. This allows your business to seek investment and limits your personal liability.
Your tax and reporting obligations will change, so it is important that you understand this before making the move to a company structure. We have summarised some key differences between sole trader and company structures below.
Record Keeping
Sole trader
- There is no need to lodge a separate tax return for your business. Business income and expenses are recorded in your individual tax return using a Business and Professional Items Schedule.
- Financial records, including tax returns, must be retained for 5 years
Company
- A company will need to lodge its own tax return
- Tax returns must be retained for at least 5 years
- Financial records must be retained for at least 7 years under the Corporations Act 2001 (Cth)
- Companies are subject to annual review by the Australian Securities and Investments Commission (ASIC)
Your financial records will need to:
- Record and explain transactions, financial position and performance.
- Allow for true and fair financial statements to be prepared and audited.
You will also need records showing compliance with other obligations and legal requirements, including having:
- A registered officer
- A principal place of business
- Regular company meetings
- A written record of meetings and resolutions.
Business Income
Sole trader
Money earned through your sole trader business is considered your individual income by the Australian Taxation Office (ATO). As a sole trader, you are responsible for any tax your business must pay, and may claim deductions for costs incurred through operating your business. You can withdraw and use money from your business bank account
Company
It is a mandatory requirement for a company to have a separate business account. However, as money earned by the company belongs to the company, money may not be withdrawn from the company as personal savings. Instead, the company may pay you wages, which must be shown on your individual tax return.
Liability
Sole trader
As a sole trader, you are personally liable for financial or tax debts. There is no distinction between personal assets or business assets. This means assets in your name can be used to pay business debts.
Company
Generally, the company will be held liable for all business debts. However, as a director of a company, your personal assets may be at risk if the company cannot pay its debts.
Tax-Free Threshold
Sole trader
The tax-free threshold for individuals applies to sole trader business structures. This is because a sole trader business structure is taxed as part of your own personal income.
Company
There is no tax-free threshold for companies. Tax must be paid on each dollar earned by the company.
Tax Rates
Sole trader
Sole traders are subject to the individual income rate.
Company
The full company tax rate is 30%. It is important to note that companies that are base rate entities are subject to different company tax rates.
More information is available on the ATO website.
Changing From A Sole Trader To A Partnership Structure
If you decide to transition from a sole trader business structure to a partnership, you will need to apply for a new Australian Business Number (ABN).
You will also want to consider a Partnership Agreement that sets out how decisions are made, how disputes are handled, and what happens if a partner decides to leave the business.
A Partnership Agreement is important even when you’re in business with friends or family, as it establishes ground rules that help ensure a healthy business relationship. You can learn more about the contents of Partnership Agreements here.
Legislation governing partnerships differs according to individual States and Territories, so it is crucial you make sure you are dealing with the correct laws.
Not sure if a partnership structure or company structure suits your business’ needs better? You can find more information comparing these two structures here.
Changing From A Partnership To A Company Structure
If you wish to change from a partnership to a company structure, you will need to dissolve the partnership before setting up the company. This transition cannot be made directly.
You can dissolve a partnership through a Partnership Dissolution Agreement.
Key Issues To Consider When Changing Business Structures
Your ABN
In most cases, you will need to cancel your current ABN and register a new ABN under the new business structure. For example, if you are a sole trader changing to a company structure, you will need to cancel your sole trader ABN and obtain a new ABN for your company.
If you are changing to a company structure, you will need to register your company through the Business Registration Service. This service will allow you to apply for key business registrations at the same time, including your new ABN, Australian Company Number (ACN), company name, and business name.
Your Business Name
When changing your business structure, you will need to transfer your business name with ASIC.
A business name transfer is a two-step process that involves:
- Transferring your existing business name; and
- Registering the business name using your new ABN
You can find out more about the process on the ASIC website.
Your Trademarks And Other Intellectual Property
If your business has any registered trademarks or logos, it is important you transfer ownership to the new entity. If you don’t do this, your new business will not legally own this intellectual property.
To transfer a trademark, you will need to submit a form to IP Australia.
What’s Next?
So you’ve successfully changed your business structure — congratulations, you’ve done the hard work!
Make sure to update and inform your clients and suppliers that your business is now operating under a new structure. Here’s what you should be looking at updating:
- Documentation: Update your business documents, such as letterheads and invoices, to include your company details, ACN or ABN, contact details, and new bank account details.
- Contracts: If your business has contracts with employees, clients, suppliers or other third parties, you will need to change or re-enter these contracts. This will ensure that the business is represented by the company, rather than you as a sole trader. You may also want to consider updating your business terms and conditions to reflect that the business is trading through the company.
- Insurance: If you have business insurance, you should talk to your insurance providers and inform them that you are operating through a company. This will make sure that you are correctly insured.
Need Help?
Changing business structure can be hard —it’s a big decision and something you want to get right!
If you want to talk through your options or are unsure about how to go about it, we’re here to help. Get in contact with our team at team@sprintlaw.com.au or give us a call on 1800 730 617 for a free, no-obligations consultation.
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