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Is your business currently outgrowing its partnership structure? You may be looking to engage investors or want to limit your personal liability. A company structure 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 to change from a partnership to a company structure requires that you dissolve your partnership and set up a company. This article explores the key steps that business owners should take when changing business structures from a partnership to a company. 

Seek Legal and Tax Advice

Before you make plans to dissolve your partnership, it is important to seek legal advice. Different business structures each have their advantages and disadvantages. Thus, you want to ensure the company structure can support your business goals when considering this change. 

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.

Likewise, when changing to a company structure, it is likely you will begin to hire staff. As an employer, your company must pay all employee entitlements and make all necessary superannuation contributions. In addition, you must provide a safe workplace that meets all occupational health and safety requirements, and comply with any relevant industrial relations legislation or awards. Before changing to a company structure, you and your partners should thoroughly discuss whether these changes align with your business goals.

You must also be aware of the different tax obligations. As a company, you will have income tax responsibilities, and you are likely to have goods and services tax obligations. Depending on your business, you might also require a special kind of 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 tax return. Each partner also pays tax on their share of the partnership profit at the individual tax rate.  

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 law in each state or territory. That means that to end your partnership and form a company, 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 how to dissolve your partnership. As you dissolve your partnership to become a company, all partners will likely need to formally agree to dissolve the partnership. The date of the agreement will be your dissolution date unless you specify otherwise.

Finalise the Business of the Partnership

Further, you will need to complete all the relevant paperwork for the partnership. This includes cancelling your Australian Business Number (ABN). Likewise, you and your partners must decide how to deal with any contracts or policies belonging to the partnership. For example, you should transfer any contract that you wish to continue to the new company.

Be aware that you must appropriately deal with all loans made to the partnership. Also, take care of all your tax obligations. Make sure all your BAS Statements are up to date and that you file a final tax return for the partnership. Consider any Capital Gains Tax implications of ending the partnership. Also, consider your employer obligations. If you are terminating staff, you must pay all entitlements and superannuation contributions correctly. Lastly, cancel any bank accounts belonging to the partnership.

Decide on Shareholding and Directorship of the Company

Before creating a new company, it is essential to be clear on what type of company is best for your needs. You will need to consider whether it will be proprietary or public and who the directors will be. It is important to appoint directors who are willing and able to execute their duties in the company’s best interests

You will also need to consider how the shareholding will be set up. Answers to these kinds of questions at the outset will guide you in setting up your new company.

Set Up the Company

When setting up your company, you will need to register with the Australian Securities and Investment Commission (ASIC). There is a fee involved, and ASIC will issue you an Australian Company Number (ACN). Once you register, you can then apply for an ABN and a Tax File Number (TFN) for the company.

Depending on its type, your company must meet all its obligations under the Corporations Act 2001 (Cth). These include reporting requirements and forwarding all necessary information and documentation to ASIC.

Transfer Business and Asset Ownership

Once the company is set up, it is essential to ensure all existing contracts are updated to reflect the newly formed company and not the dissolved partnership. It is also important to ensure that any title deeds for business assets are updated to reflect that the new company owns them.  

Organise Governance Documents 

Similar to how a partnership agreement generally governs a partnership, it is critical to ensure the company has governance documents, including a shareholders agreement, constitution and any employee share schemes that the company may wish to implement. In addition, governance documents are important to ensure your company operates in a structured way and there are agreed processes to deal with disputes. 

Key Takeaways 

If you have outgrown your partnership structure, changing to a company can be an ideal option. Generally, the process is to:  

  • seek legal and tax advice;
  • dissolve your partnership;
  • finalise the business and ongoing transactions of the partnership;
  • decide on shareholding and directorship of the company;
  • set up the company;
  • transfer business and asset ownership to the newly formed company; and
  • organise governance documents.

For assistance with changing your business structure, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

Is a company structure right for me?

Determining whether a company structure is right for your business will depend on your business goals. For example, if you are looking to grow, a company structure can offer some ease towards financial loans as investors and banks look favourably towards companies. You can also limit your personal liability when operating as a separate legal entity. However, be prepared to meet all obligations under the Corporations Act 2001, including reporting requirements to ASIC. Ultimately, this is a question you need to ask yourself, with the help of business professionals, tax advisors or a lawyer.

How do I set up a company?

Assuming you have properly dissolved your partnership, you will need to register with ASIC to set up your company. There is a fee involved, and ASIC will issue you an ACN. Once you register, you can then apply for an ABN and a TFN for the company.

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