Do you need to change your business structure?

As your business grows, you may want to consider changing your business structure to reorganise the governance structure of your business to meet the changing circumstances. Some of these changed circumstances would include:

• Your business may have expanded its operation into overseas markets, and you need to change your structure to accommodate this growth.
• You may want to restructure to improve the way your business operates and have better cash flow and processes to increase the profitability of your business.
• Asset protection for your personal assets.

The common business structure changes include:

Sole trader to company

By changing your business structure from a sole trader to a company, you can limit your personal liability, and reduce exposure of your personal assets being attacked by creditors, as a company is a separate legal entity. Once you have decided to set up a company structure, you will need to register your company through the Australian Government’s Business Registration Service. Here, you can apply for an Australian company number (ACN), company name, Australian business number (ABN), business name, and other key business registrations. You should transfer any assets and licences including trademarks and other intellectual property (IP) to the new registered company. As you cannot transfer your sole trader ABN to your new company, you will need to cancel it.

Sole trader to partnership

If you started as a sole trader and now want to take on a partner, you will need to apply for a new ABN. If you want a new business name, you will need to cancel your business name with Australian Securities and Investments Commission (ASIC). You will also need to contact IP Australia if you need to transfer IP or change any registered trademarks or logos. When you decide to bring a partner into your business, it needs to be clear to everyone what the terms and conditions are including the percentage of ownership, decision making, liability and responsibilities. You should have a partnership agreement that governs the business relationship between the partners to ensure everyone understands how the partnership will run. The legislation that governs the partnership is state-specific so you should seek advice to understand your partnership’s legal, tax and reporting obligations.

Partnership to company

In order to convert from a partnership to a company, you will need to dissolve your partnership and set up your company as you cannot transfer your partnership into a company. A business partnership can be dissolved, if the partnership term stated in the formal partnership agreement has expired. Another way to dissolve a partnership is when one partner provides notice in writing to the other partners to exit the partnership. A partnership may be dissolved if one or more partners cannot legally own a business anymore, one of the partners become bankrupt or if a partner dies. If the business becomes bankrupt or insolvent, the partnership will be dissolved too. A court may also issue a court order to dissolve the business partnership. If there is no partnership agreement in place, the state-specific legislation (Partnership Act) will guide the terms and conditions to dissolve a partnership, please be aware there may be different legal requirements for each state.

As you decide which kind of business structure best suits your business and situation, you should develop a business plan that reflects the proposed structure and outline the objectives and goals of your business.

You will need to report changes to your business structure within 28 days to the relevant agencies, organisations and governments including the Australian Taxation Office (ATO), Australian Business Register (ABR) and ASIC.

You will also need to consider any potential tax liability, and in particular Capital Gains Tax, as a consequence  of transferring assets to a new structure as this could be significant.

Should you have any questions please do not hesitate to contact us on 8525 2700 or click here to request an appointment with one of our experienced Solicitors.

Article written by Judy Wong
Photo by Medienstürmer on Unsplash