A business structure is often the first thing to change when your business grows. By reorganising your structure you can potentially become more profitable, improve processes and adapt to the changing needs of your business. You may be restructuring to meet financial goals and objectives, such as improving cash flow or profitability of the business. Your business may have expanded overseas, or you’re expanding your product functions and need to change your structure to accommodate this growth.
Many businesses start off with a sole trader structure and shift to a company structure when the sole trader feels the time is right to move to the more tax efficient, safer company structure. This article sets out the steps to take in order to move your business structure from sole trader to company quickly, efficiently, and in a cost effective manner.
Decide on Ownership and Office Holders
The first matter to decide on is whether you’re going to bringing on board new shareholders or not. If you are, you will want to work out if you’re going to have more than one office holder. Once these decisions have been made you will be in a position to incorporate your company.
Generally the most appropriate structure to use will be a PTY LTD company. You can either instruct an accountant or lawyer to do this for you or use an online company incorporation site like www.ecompanies.com.au. It’s important that you choose a company name that isn’t in use, and of course if you can use the same name as the business name you’ve been trading under as a sole trader, you’ll ensure continuity in your branding.
Amend your Business Terms and Conditions
As you’re setting up a new business structure through which to trade, you’ll have to amend your business terms and conditions. A lawyer can do this for a low fixed-fee, as the changes should be relatively minor, but it’s important that your terms reflect the fact that the business entity is now a company.
Advise Your Clients and Suppliers
It’s important for you to advise your clients and suppliers that you’ll now be trading through a company. You’ll need to advise them of your new bank account details and provide them with your new business terms and conditions. If you’re operating under contractual arrangements with your customers or suppliers you will have to ensure the old contract is cancelled, and a new one, with your company as the counterparty, is signed. You should do this as quickly and efficiently as possible in order minimise the hassle for your accountant and your liabilities.
You’ll need to make sure your insurance provider understands you’re now operating through a company and insures you correctly.
If you do have any employees (unlikely if you’re a sole trader, but not out of the question) you will need to transfer their employment to the new company. This means entering into new employment contracts with each employee with your company as the employer.
Transfer the Assets to the Company
This last step is in fact the most complicated. Many sole traders don’t actually have many assets, so they don’t need to worry about this issue, but if you do need to transfer assets it’s important to discuss the transaction with your accountant or a tax lawyer. The tax treatment of the transfer is crucial; you will obviously want to minimise it as much as possible!
Changing your business structure is actually quite complex, which is why it’s a good idea to set yourself up with a company structure from the get go. If you do need to change your structure, it’s important to get good legal advice in order to avoid legal or tax issues.
By Jill McKnight.
Jill is a Principal Lawyer at LegalVision with a strong background in banking and finance law. She has over 15 years’ of experience in banking and finance transactions, with a particular focus on asset finance, leasing, business structuring, start up and online law for small businesses.