Table of Contents
- What Are the Benefits of Incorporation?
- 1. Decide Who Will Be Involved in the Company
- 2. Understand the Tax Consequences of Changing to a Company
- 3. Incorporate a Company
- 4. Transferring the Business’ Assets
- 5. Transferring and Updating Contracts
- 6. Changing Business Insurance
- 7. Tips and Tricks
- Key Takeaways
A sole trader is an individual who carries on a business, whereas a company is its own legal entity. A company is separate from the individuals in the business. This article will guide you through the step-by-step process of transforming your business structure from a sole trader to a company. Learn about the benefits, legal requirements, and tax implications involved in this transition.
What Are the Benefits of Incorporation?
Many businesses start as a sole trader because it is the simplest and cheapest way to establish a business and has minimal legal formalities. However, there are key reasons why you may want to change your business structure to a company structure, including:
- companies have limited liability. This means that your personal assets are separate from the debts and liabilities incurred by the company. Accordingly, company creditors cannot come after your personal assets;
- a company structure is considered more professional and sophisticated;
- possible tax advantages to running a business through a company structure; and
- a company structure can better facilitate growth. It also allows the business to take on other stakeholders, such as investors in the company.
The following sections outline the steps to change your business structure from a sole trader to a company.
1. Decide Who Will Be Involved in the Company
A company has two main stakeholders:
- its ‘officeholders’, being the company’s directors and company secretary who are responsible for managing the company; and
- the owners of shares in the company, known as the company’s ‘shareholders’ or ‘members’.
When considering setting up a company, you will need to decide who will be the officeholders and shareholders of the company. To begin with, you may be the company’s sole director and secretary, as well as the sole shareholder. As the company grows, you may appoint other officeholders and issue shares to new shareholders.
If you are a shareholder in a company, you should also consider how to hold your shares in your company. For example, you may choose to hold your shares as an individual or through another arrangement, such as through a discretionary trust.
Continue reading this article below the form2. Understand the Tax Consequences of Changing to a Company
A company is its own legal entity, which is separate from you. Changing your business structure to a company means you, as a sole trader, are selling your business to a new entity, being the company.
If your business is quite valuable (including all of its assets and goodwill), obtaining financial and tax advice is a good idea. This will help you understand how much money the company should pay to purchase the business from you and the tax consequences of doing this. You should also consider any tax relief that you can claim as part of the business restructure.
3. Incorporate a Company
Once you decide who the company’s officeholders and shareholders will be, you need to incorporate the company. First, you will most likely set up a ‘proprietary’ company, otherwise known as a ‘private company’.
As part of incorporating the company, you will also need to notify ASIC of the:
- company name (you should check the ASIC website to see if your desired name is available);
- registered business name (if you intend on trading under a different name than the company name or currently own a registered trading name as sole trader);
- address that will be the company’s registered address;
- address that will be the company’s principal place of business;
- details of the shareholders and the shares they each own; and
- details of the company’s officeholders.
4. Transferring the Business’ Assets
You may need to transfer the business’ assets to the new company depending on what the business owns. To do this, you may need to:
- transfer your registered trading name (if applicable);
- notify IP Australia that the owner of any patent, trademark or design registration has changed;
- enter a sale agreement to transfer the business assets over to the new company;
- enter into IP assignment agreements whereby any IP you own is assigned to the new company;
- transfer ownership of any registered business names to the new company; and
- change the registrant of your domain names to the company.
5. Transferring and Updating Contracts
If your business has contracts with third parties, including employees, suppliers or clients, you must either amend or re-enter them. This is because your company will be representing the business, not you as a sole trader.
You should advise any employees, suppliers, clients or other third parties you have contracts with that you will now be trading through a company. You may also need to assign or novate the contracts to the company or enter into new contracts as the company. Novating a contract is the process of terminating one contract and replacing it with another. You may also need to notify any third parties of your new bank account and billing details where relevant.
If you have business terms and conditions that you operate under, these should be updated to reflect that the business is trading through the company.
6. Changing Business Insurance
If you have business insurance in place, you should notify your insurance provider that you are now operating under a company structure. This helps to ensure that they are insuring you correctly.
7. Tips and Tricks
Transitioning from a sole trader to a company structure can bring certain challenges and risks. However, you can mitigate these potential risks with careful planning and proactive measures.
The following sections outline some common challenges and strategies to consider when approaching them.
Tax Implications
When changing your business structure, it is essential to understand the tax consequences involved. A tax professional can guide you through the process and help you optimise your tax position. They can provide valuable advice on any tax relief or deductions you may be eligible for during the transition.
Legal and Administrative Requirements
Moving from a sole trader to a company entails legal and administrative obligations, including:
- registering the company;
- notifying relevant authorities; and
- updating licenses and permits.
Engage the services of a business lawyer who can assist you with navigating the legal requirements and ensure compliance.
This guide will help you to understand your corporate governance responsibilities, including the decision-making processes.
Transfer of Business Assets
Transferring your business assets to the new company can be complex. Intellectual property, such as patents or trademarks, may require specific procedures to change ownership. You should notify the appropriate agencies, such as IP Australia, and consult legal professionals to draft appropriate sale or IP assignment agreements. Ensure all necessary documentation is in place to protect your business interests in future.
Contractual Obligations
Review your existing contracts with clients, suppliers, and employees, as they may need to be updated or re-entered under the new company structure. Additionally, communicate the transition to all parties involved and consider assigning or novating contracts to the new company. You should also seek legal advice to ensure a smooth transition and compliance with contractual obligations.
Communication With Stakeholders
Inform your employees, suppliers, and clients about the transition to a company structure. Clearly communicate the changes, including any new billing details or contact information. Maintain open lines of communication to address any concerns or questions they may have. Consistent and transparent communication will help ensure a seamless transition and maintain positive relationships.
Operational Adjustments
Shifting from a sole trader to a company structure may require adjustments to your business operations. Notably, develop a comprehensive plan to address changes in management, decision-making processes, and corporate governance. Consider training or onboarding programs to familiarise employees with the new structure and their roles within it. This will help maintain productivity and ensure a smooth transition.
Insurance Coverage
Update your business insurance to reflect the new company structure. Notify your insurance provider about the change and review your policies to ensure appropriate coverage for the company’s activities and potential risks. Further, working closely with your insurance provider will help protect your business from unforeseen liabilities.
Key Takeaways
As you grow your business, you will likely change from a sole trader structure to a company structure. Remember, each business is unique, and your challenges during the transition may vary. Seeking professional guidance, communicating openly with stakeholders, and careful planning can significantly mitigate the risks of changing your business structure.
This transition will have many long-term benefits for your business, but restructuring can be complex from a legal, administrative and tax point of view. You need to understand how a company structure operates and what is required to transfer your business to your new company.
Boost your business’ potential with a seamless transition to a company structure. Our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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