A sole trader is an individual who carries on a business, whereas a company is its own legal entity separate from the individuals in the business. Many businesses start off as a sole trader business because it is the simplest and cheapest way to establish a business and has minimal legal formalities. However, there are many 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. This means that creditors cannot come after your personal assets in the event of a wind-up or liquidation;
  • 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.

This article sets out the steps required to move 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:

  1. its ‘officeholders’, being the company’s directors and company secretary who are responsible for managing the company day to day; and
  2. 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.

2. 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 essentially means you are selling your business to a new entity, being the company.

If your business is quite valuable (including all of its assets and goodwill), it is a good idea to obtain financial and tax advice. This will help you understand how much money the company should pay to purchase the business from you as well as the tax consequences of doing this. You should also consider any tax relief that you may be able to claim as part of the business restructure.

3. Incorporate a Company

Once you have decided who the company’s officeholders and shareholders will be, you need to incorporate the company. To start with, 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);
  • 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.

Once your company is incorporated, you should register other business registrations such as an ABN and TFN for the company. Your company may also need to register for GST if your turnover exceeds $75,000 a year and PAYG if it has employees.

4. Transferring the Business’ Assets

Depending on what the business owns, you may need to transfer the business’ assets to the new company. To do this, you may need:

  • to notify IP Australia that the owner of any patent, trademark or design registration has changed;
  • a sale agreement to transfer the business assets over to the new company;
  • to enter into IP assignment agreements whereby any IP you own is assigned to the new company;
  • to transfer ownership of any registered business names to the new company; and
  • to 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, these will either have to be changed or re-entered into. This is because your company will be representing the business, not you as a sole trader.

You will need to 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 essentially 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.

Key Takeaways

As you grow your business, you will likely change from a sole trader structure to a company structure. This may have many long-term benefits for your business, but depending on your business, 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 across to your new company. If you have any questions about changing your business structure, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Sophie Mao

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