- Changing business structure can be an expensive exercise so it is best to choose the right structure from the start.
- Maximising tax benefits and limiting legal liability are two of the most common advantages in changing business structures.
- In most cases, you will need to register a new Australian business number (ABN).
Changing Business Structure
As a business grows, this can lead to significant changes in how the business operates. Changing a business’ structure can bring many long-term benefits including restructuring the business’ taxation requirements, legal liability and ongoing costs and maximising its asset protection.
Many businesses move from a sole trader structure to a partnership or company structure when they grow. A common structure is an incorporated company (Pty Ltd). Businesses should carefully consider whether a business restructure is necessary as it may be time consuming and an expensive exercise to execute. However, for sustained growth and ensuring the business performs at its best, changing its structure may be a crucial step.
If there is significant value building in the business such as the value of assets held or the development of intellectual property and goodwill, changing business structure can protect against a business’ assets against unexpected risks. Changing business structure comes at a cost so the earlier you identify the right structure, or the need to restructure, the better.
A common structure for a new business is a private company, also known as a PTY LTD company. A lawyer or accountant can incorporate a company for you – LegalVision can assist. It’s important that you choose a company name that is not in use. You can ensure continuity by using the same business name as your new company name.
Key Issues to Consider
- What kind of business structure would be suitable to change to?
- Do you need to apply for a new ABN?
- Do you need a new business name or trademark?
- Do you need to draft a new agreement, terms and conditions or constitution?
- Who do you need to advise (regulatory bodies, clients, suppliers, insurers, etc.)?
How to Change Business Structures
For successful businesses, simple business structures seldom work as they leave the business exposed, are ineffective for taxation obligations and inefficient for succession or sale. Successful businesses that experience fast growth often operate through a mix of company and trust structures – ideal for maximising tax efficiency, mitigating risk and allow succession at ease.
As changing your business structure will have a significant impact on the operations of the business, it is important to plan appropriately. This may involve collaborating with the business’ accountants, lawyers, tax specialists and financial advisers. Employees should also be involved with any changes in the business structure as it affects how the business is operated and its management.
If you decide to go ahead with changing business structure, you will need to find out whether your new structure requires directors or official office-holders. If you are changing to a company, you will need to incorporate your entity. Your business terms and conditions will also have to be amended to reflect this change.
If you choose to change structure, you need to update your business documents (e.g. letterhead and invoices) and legal agreements (e.g. client agreement) to include your company details, ACN or ABN, and contact details.
It is also important to inform your clients and suppliers that your business is now conducted through a new structure. You’ll need to inform them of any new bank account details and provide them with your new business documents.
If you operate under contractual arrangements with your customers or suppliers, you will have to ensure the old contract is cancelled, and a new one is executed by your new structure. If you transfer business assets, it is important to discuss the transaction with your accountant or a tax lawyer.
Frequently Asked Questions about Changing Business Structures
Q: Do I always need to cancel my ABN when changing business structures?
A: You will need to cancel your ABN if you are changing from a sole trader to the partnership, a partnership to company or sole trader to the company.
Q: What type of business structure is a franchise?
A: A franchise can be operated as a sole trader, partnership, company or trust.
Q: What costs should I be aware of in changing business structures?
A: A business may be required to pay capital gains tax and stamp duty.
Q: How would this change affect my insurance?
A: You need to inform your insurance providers that you are now operating through a company to ensure your business is being correctly insured.
How can LegalVision help me?
LegalVision provides businesses and individuals with tailored online legal advice, including advice on how to change business structures in the most efficient and cost-effective manner. We provide fixed prices for your certainty and peace of mind. Call LegalVision today on 1300 544 755.