Answer:
As your business grows, you may find yourself outgrowing your sole trader structure. If you intend to hire employees, seek investment for your business or manage your personal liability, you may consider changing to a company structure.
The law treats a company as a separate legal entity. This means that you will not be held personally responsible for the actions of your business. A company structure is also beneficial as it continues to survive even after the owners and directors can no longer run its operations.
Company Compliance
Before changing your business structure, you should familiarise yourself with the Corporations Act 2001 (the Act). Under the Act, you have a duty as a director to act in the best interest of the company. There are penalties for non-compliance. If you are a director and breach your duties, you expose yourself to personal liability.
There are also regulatory costs associated with compliance, such as paying annual fees to ASIC and lodging Business Activity Statements. Your new company will also be subject to different tax rates and tax compliance requirements.
Changing to a Company Structure
Once you have decided to change your business structure, you will need to register your company by lodging an application through Australian Securities and Investments Commission (ASIC). If ASIC approves your application, you will receive an Australian Company Number. You should then cancel your sole trader Australian Business Number (ABN) and apply for an ABN in the company’s name. You cannot transfer your sole trader ABN to your new company.
If your business has a registered business name, you should transfer ownership of the business name from yourself (as sole trader) to the new company. This way, your business can continue operating using that same business name. Also consider whether your company needs to apply for a Tax File Number, register for GST or PAYG withholdings.
Transfer any assets and liabilities from your existing business to your new company as soon as possible, for instance, trade marks, licenses and existing contracts. You should understand that such a transfer may have tax and accounting consequences, and we encourage you to seek financial advice before restructuring your business.
Registration and Record Keeping
If there are any changes to your company details after registration such as changes in shareholding or the directors, you must update ASIC within 28 days. If you register for GST, you will also need to lodge a business activity statement.
Companies must keep financial records for seven years. You may choose to engage a bookkeeper to assist with maintaining accurate financial records.
