It’s normal for your business to change and evolve over time. As your business grows, these changes could look like hiring employees, taking on new company assets, making investments or expanding into new markets.
While this can be exciting, it also means that your business could be outgrowing the governance structure that you chose when you first started it and that structure may no longer be suitable for your and your business needs.
So, at what point should you consider changing your business structure?
A common change in business structure involves going from a sole trader to a company structure. A company is a separate legal entity so this may offer some benefits to you, such as limited liability. If your business takes on more assets and investments, this can be a pragmatic move to try and minimise your personal liability.
If you do decide to make the switch, you will need to start considering your legal duties as a company director, complete annual ASIC reviews and maintain detailed financial records. You will also need to register your company with ASIC and go about transferring your IP and contracts to the new company. We’ll take you through this below!
Costs And Liabilities: Is The Company Structure Right For Me?
Limited Liability vs Unlimited Liability
While a company can be more costly and complex than the sole trader structure, it is a separate legal entity with limited liability. This means that, generally, you will not be personally liable for any company debts.
Many people begin as sole traders as it is simple and cheap to set up when starting a new business venture. As a sole trader, you have unlimited liability. This means that you will be personally responsible for any debts or losses in your business.
It is important to note that there are still some circumstances in which you may be personally liable for company debt. For example, if you are seeking to get a business loan, a bank/financier will usually require a ‘director’s guarantee’ for the loan. If your company cannot make repayments, your guarantee will hold you personally liable for those debts.
Additionally, a director may be personally liable for any debts incurred through insolvent trading. Directors have a duty to prevent the company from trading if it is insolvent, i.e. unable to pay its debts when they fall due.
Costs and Record Keeping
However, companies are also more costly and complex business structures than sole traders. You will have to pay more fees to register your company and a business name. Accounting fees and administrative paperwork are also more onerous for companies.
Comparatively, as a sole trader, you will enjoy considerably less paperwork and less costs. It is free to set up an ABN which you can immediately begin trading under. You will also pay tax on your business income earned through the business through your annual personal income tax.
Ultimately, if your business is expanding and you are beginning to make investments which are worth greater value and involve higher risk, it may be a good idea to switch to the company structure to protect your personal liability. Keep in mind that there may be exceptions to limited liability. Otherwise, it sometimes makes sense to continue operating as a sole trader, especially given the greater costs and complex admin involved in running a company.
You can also find out more information about the pros and cons of these different business structures here.
What Are My Ongoing Duties And Responsibilities In Running A Company?
If you do decide to switch over to a company structure, you will have a number of ongoing new responsibilities and obligations.
As the director of a company, you will need to ensure that you understand and comply with your duties as outlined in the Corporations Act 2001.
There are four general director’s duties:
- To act with due care and diligence;
- To exercise your powers and duties in good faith in the company’s best interests and for a proper purpose;
- To not improperly use your position for your own advantage or to the company’s detriment; and
- To not improperly use information obtained through your position for your own advantage or to the company’s detriment.
There are also an array of additional director’s duties. These include a duty to prevent insolvent trading, a duty to keep adequate financial records and a duty to lodge information with ASIC. Depending on the duty and the outcome of a breach, there can be significant and serious civil and criminal penalties If There Is A Breach Of A Director’s Duty.
ASIC Annual Company Review
To keep your company registered, you must also participate in an annual review of your company by ASIC.
We’ve explained the ASIC Annual Review: How To Prepare And Complete It, but in short, this review is an assessment of your solvency, namely your ability to pay your debts. ASIC conducts these checks to ensure it has up to date details for your company and to confirm that the company can pay its debts when they’re due. You will need to complete an annual statement and pay an annual fee for the ASIC review to ASIC.
Financial Record Keeping
All companies must keep a written/electronic form of financial records explaining their financial position and performance. This may include invoices, receipts, cheques and working papers.
Company financial records and tax records need to be maintained for at least 7 years and 5 years respectively. These could be profit and loss statements, balance sheets, depreciation schedules and taxation returns.
4 Key Steps In Restructuring Your Business
- Register Your Business
You can register your business with the Business Registration Service. This will help you set up with an ABN, ACN and company name. An ACN is a unique 9 digit identifier which is only given to companies.
All businesses, regardless of their structure, require an ABN. This is a unique 11 digit number which is used for running and identifying a business as it deals in commercial transactions and with the Australian Taxation Office. You will not be able to transfer the ABN that you’ve used for your sole trader operations. Most changes to structure will require applying for a new ABN and you will need to cancel your old one. This will also cancel your GST and PAYG registrations and they will need to be set up anew.
- Transfer Your Business Name
You will also need to apply to ASIC to transfer your business name if you previously registered it while operating as a sole trader and wish to continue using the same name. This is a two-step process where you first submit a request to transfer. ASIC will then cancel the registration within 28 days and you can register the name to your new business using the transfer number.
- Transfer Your Intellectual Property and Assets
The company should own all of the IP rights. This is so that the company’s legal entity owns your trade mark or patent and is able to then deal with the IP in commercial transactions. For example, investors will often check whether all of the IP sits within the company.
If you have been operating as a sole trader so far, it is likely that you currently own all of the IP. You can create a contractual agreement known as an IP Assignment Agreement to then assign the IP rights to the company. It is also important to remember that if you’ve worked with other unofficial business partners, they may hold some of the IP and they will also need to sign an IP Assignment Agreement.
- Transfer Contracts, Licences, Assets and Records To Your New ABN/ACN
You will also need to ensure that you transfer all leases, permits and licences to the company ABN/ACN.
Key business records including customer, employee and financial records should also be transferred to the new company.
We know that it can be a difficult and important decision to take your business to the next step. It can also be daunting to try and understand your new complex legal responsibilities and duties under corporate law.
If you have more questions about restructuring your business, reach out to us at firstname.lastname@example.org or contact us on 1800 730 617 for a free, no obligation chat.
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