As your business grows and evolves, you may need to change your business structure to improve efficiency, reduce risk, or meet financial goals. Transitioning from one business structure to another can have legal and tax implications, so it’s important to understand the process before you get started.
Reasons to change your business structure
There are several reasons a business owner may need to restructure the business. These may include:
- Business expansion: Entering new markets, taking on investors or acquiring assets may require a company structure.
- Legal protection: Sole traders and partnerships have unlimited liability, putting personal assets at risk. A company structure provides legal separation.
- Tax efficiency: Company tax rates (30%) may be lower than individual tax rates, depending on your income.
- Operational changes: If your business structure no longer suits how you operate, restructuring can improve efficiency.
- Economic conditions: In times of economic difficulty, downsizing from a company to a sole trader can reduce administrative and compliance costs.
Common business structure changes
According to the federal government, the most common business structure changes are:
Sole trader to company
A sole trader structure is ideal for small businesses, but as your business grows, it may make sense to transition to a company. A company is a separate legal entity from its owners, providing protection from personal liability.
Once you decide to set up a company structure, there are three key steps you must follow:
- Register your company: You can register your company through the Business Registration Service. This service allows you to apply for an Australian company number (ACN), company name, Australian business number (ABN) and business name.
- Transfer assets: After your company is registered, you should transfer any licences and assets (including trademarks or intellectual property) to the new company.
- Cancel your ABN: If you’ve been using your sole trader ABN to do business, you’ll need to cancel it. Your sole trader ABN cannot be transferred to your new company.
Sole trader to partnership
A partnership allows for shared decision-making, responsibilities and financial contributions while using a relatively straightforward structure.
The legislation that governs partnerships varies by state, so it’s important to understand your partnership’s legal and tax reporting obligations before you get started.
Once you decide to form a partnership, follow these key steps:
- Register your partnership: You’ll need to apply for a new ABN for the partnership. Sole trader ABNs cannot be transferred. You should also register a business name if it differs from your personal name.
- Create a partnership agreement: A formal agreement outlines how the partnership will operate, covering key aspects like profit-sharing, decision-making, liabilities and exit strategies. Seek legal advice to ensure your agreement is clear and fair.
- Transfer assets and licenses: Any business assets, licences or intellectual property associated with the sole trader entity may need to be transferred to the partnership.
Partnership to company
If your partnership is expanding and requires more structure, legal protection or opportunities for investment, converting to a company may be the next step. A company structure provides limited liability for owners and allows for easier ownership changes.
To transition from a partnership to a company, follow these steps:
- Register your company: Apply for an ACN and register the company through the Business Registration Service. You will also need a new ABN and may need to register a business name if applicable.
- Dissolve the partnership: A partnership cannot be directly converted into a company, so you must formally dissolve the existing partnership before proceeding. This may involve finalising outstanding tax obligations and informing relevant stakeholders.
- Transfer assets and agreements: Business assets, contracts and intellectual property must be transferred from the partnership to the newly established company. Be sure to review any existing agreements with suppliers, clients or financial institutions to ensure a smooth transition.
Get professional help
Changing your business structure is a big step that requires careful planning and knowledge of Australia’s business structure laws. Speak to your accountant and lawyer to help ensure your new business structure complies with all legal and tax obligations.