Operating a business as a partnership has benefits during your business’ beginnings. However, your business may reach a point where it is ready for rapid growth, and the legal risks associated with operating a business are growing. To grow, you may be looking to engage third-party investors or want to limit your personal liability. Transitioning your business structure from a partnership to a company can help you achieve these goals. As a separate legal entity, a company can limit the liability of you and your business partners.
In general, the process of transitioning from a partnership to a company business structure requires that you transfer the business from the partnership to the company and dissolve your partnership. This article explores the key steps business owners should take when transitioning business structures from a partnership to a company.
Seek Legal and Tax Advice
Before you plan to move from a partnership to a company, you and your partners should seek legal and tax advice. Different business structures each have their advantages and disadvantages. As such, you want to ensure the company structure can support your business goals when considering this change.
You must also be aware of the different tax obligations. As a company, you will have income tax responsibilities, including goods and services tax obligations. Depending on your business, you might also require a special licence. As a partnership, the partnership does not pay income tax on the profit it earns. Each partner reports their share of the partnership income in their own personal tax return. Each partner also pays tax on their share of the partnership profit at the individual tax rate.
This ensures the company has the right to ownership of the business assets and operate the business. Restructuring means that the partnership is selling the business to the new company. This is a capital gains tax (CGT) event for the partnership, which may give rise to a tax liability for the partners.
However, you can minimise the tax liability when undergoing a business restructure. The partners may access a CGT Rollover Relief, which defers any CGT liability to a later date so that it is not payable for a genuine business restructure.
Partnership vs Company
In a partnership, all partners own the business and its assets jointly. While the setup and running costs for a partnership are low, partners are equally responsible for debts. Therefore, there is scope to share profits and losses with others involved in the running of the business. Each partner also carries unlimited liability. So, where the partnership business incurs a debt, each partner has unlimited liability concerning that debt. Likewise, their personal assets may be used to satisfy the debt.
A company is a separate legal entity separate from its directors and shareholders. A company has the same legal rights as a person. This means the company can purchase assets and enter contracts in its own name. When the company incurs a debt, generally, it is the company’s to pay as opposed to its directors or shareholders.
One of the main benefits of running your business through a company is asset protection. Directors of a private company limited by shares are generally not liable for their company’s debts. As the company is a separate legal entity, the company’s debts are generally the company’s.
As a director, one of your most important directors’ duties is to prevent insolvent trading. If you allow the company to trade while insolvent, you will be in breach of your directors’ duties. Consequently, you may be legally responsible for the company’s debts during this period of insolvent trading.
Shareholders are generally not liable (or legally responsible) for company debts. As a shareholder, you are only legally responsible for any amount unpaid on your shares.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
Setting Up Your Company
When setting up your company, you must register with the Australian Securities and Investment Commission (ASIC).
Once your application to register the company is accepted, your company will receive an Australian Company Number (ACN). You can then apply for an Australian Business Number and a Tax File Number (TFN) for the company.
Transferring Business and Asset Ownership
Before transferring the business from the partnership to the company, you should obtain tax advice regarding the implications of restructuring for each partner. Likewise, you can ask about accessing the CGT Rollover Relief.
Once you set up a company, you should prepare a business transfer deed. This document essentially sells the business from the partnership to the company. This business transfer includes the transfer of all aspects of the business such as, but not limited to:
- assigning all existing business contracts from the partnership to the company so the company can receive the benefits of the contract while being responsible for the obligations under that contract; and
- transferring physical ownership of the assets from the partnership to the company and transferring any ownership titles from the partnership’s name to the company.
Organising Governance Documents
Similar to how a partnership agreement generally governs a partnership, it is critical to ensure the company has appropriate governance documents. Such documents include a shareholders agreement and company constitution. These documents govern, amongst other aspects:
- the company’s processes at a board and shareholder level;
- the process for issuing or transferring shares; and
- dispute resolution processes.
Finalising the Business of the Partnership
Once the restructure has been finalised and the business has been transferred from the partnership to the company, you will need to wind up the partnership’s affairs. This includes:
- checking any bank accounts in the partnership’s name are closed;
- reviewing all partnership records/registers to ensure all partnership property is dealt with (e.g. vehicles, land, shares, trade marks, intellectual property, leases, permits);
- registering all transfers of partnership property to the company and ensuring no property is registered in the partnership’s name;
- transferring all registered business names the partnership holds to the company; and
- cancelling or transferring any licences the partnership holds to the company.
Dissolving the Partnership
Most partnerships have a written agreement to govern the partnership. Amongst other things, this agreement usually provides the process for ending a partnership. Of course, all agreements remain subject to relevant partnership legislation in each state or territory. Accordingly, to end your partnership, you will need to consult your partnership agreement closely. If it provides a procedure for dissolving the partnership (and most usually do), follow that process.
If your partnership has no agreement, the relevant law in your state or territory will determine the process. As you dissolve your partnership to become a company, all partners will likely need to formally agree. The date of the agreement will be your dissolution date unless you specify otherwise.
Key Takeaways
If you are looking to grow your business and want to limit your personal liability, restructuring from a partnership to a company can be an excellent option. Generally, the process is to:
- seek legal and tax advice;
- set up the company and organise the company’s governance documents;
- transfer business and asset ownership to the newly formed company;
- finalise the business and ongoing transactions of the partnership; and
- dissolve your partnership.
You should always seek professional legal and tax advice before restructuring your business. By fully understanding how the different structures can meet your business needs and align with your plans and goals, you can make an informed decision regarding whether to change from a partnership to a company.
For assistance with restructuring from a partnership to a company, our experienced business lawyers can assist you 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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