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Changing Your Business Structure From a Sole Trader to a Partnership

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When starting a business, it is common to begin under a sole trader structure. This is an affordable way of starting a business without the pressure of expensive reporting requirements, administrative burdens and lengthy legal documentation. However, it is common for sole traders to change their business structure into a partnership. The reasons for doing so might include the fact that the business has grown and taken a different direction. Your business might also forge strategic alliances, which make it beneficial to change to a partnership. The process for changing this structure and updating ASIC is relatively simple. This article outlines practical steps to convert your sole trader into a partnership.

What is a Partnership?

A business partnership is an association or group of individuals who conduct a business together and share its profits and losses. Different state or territory legislation will govern your partnership, depending on where you are located. Unlike a corporate structure that limits the liability of its owners, each partner is liable to the business’ conduct. 

Your partnership must register for an Australian Business Number (ABN) to report its annual income and losses. Also, each partner will be taxed on the income they receive from the partnership according to their marginal tax rates. 

Benefits of a Partnership

Changing your business structure from a sole trader to a partnership can have many benefits. For example, a partnership structure allows you to share the liability and workload amongst several individuals. It can also be a strategic way to grow your business by involving other parties who may have:

  • additional skill sets; 
  • networks; or 
  • capital for investment. 

Unlike a corporate structure, operating a business under a partnership does not limit your individual liability from the business. Partners are all liable both as a group and individually for each other’s actions. However, a partnership can also operate as a limited liability partnership. In this structure, each partner’s liability is limited by the extent of their capital investment in the partnership.

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Practical Steps to Converting From a Sole Trader to a Partnership

The Australian Taxation Office (ATO) and the Australian Business Register (ABR) require you to update any changes in your business within 28 days. When changing business structure, you must transfer your business name with the ABR. They will then give your partnership a new business number. Your partnership will also need its own tax file number (TFN) registration with the ATO. 

You also need to declare any business capital you transfer into the partnership in your partnership’s tax return. If you decide to operate your business through a limited liability partnership, you will need to register this entity with the Australian Securities and Investments Commission (ASIC). 

Intellectual Property Considerations

When operating as a sole trader, likely, you have already registered a trade mark or business logo under your personal name. The next step is to complete a Declaration Form from IP Australia so they can assign any trade marks to your new business. Assigning intellectual property from one party to another is different from other proprietary rights such as licensing. An assignment effectively transfers the right to use the distinguishing mark or name and the right to profit from any of the goodwill attached to it.  

Once IP Australia approves the assignment, the transferee becomes the new owner of the trade mark. You should update any websites associated with the business to reflect the change in business structure.

Tax Considerations

Even though you must separately register your partnership with the ATO and lodge an annual tax return, a partnership structure does not have a separate legal personality. Any income shared amongst the partners will be taxed according to each partner’s marginal tax rate. Additionally, you must note the capital position of the partnership in your partnership tax return. However, individual partners realise any capital gains or losses according to their interest in the business. 

Whilst it is not necessary for your partnership to have a partnership agreement, it is best practice to draft one. The partnership agreement acts as the governing document which details how you will share any profits and losses amongst the partnership. It also gives the partners a clear understanding of the terms of engagement and rules within the partnership. Suppose a dispute arises within the partnership, and there is no partnership agreement, or it does not have an adequate dispute resolution mechanism. In that case, the governing state or territory partnership legislation will apply.

Business Documentation

Once your structure has changed, you will want to update your business’s promotional material to reflect its new or amended name. You will need to change any business-related commercial contracts you drafted when operating as a sole trader. This ensures your contracts are legally binding between the correct parties. This includes any contracts which might be in place between an individual as a sole trader and another party such as a supplier or sub-contractor. 

In order for a business contract to bind the partnership, all partners must sign the contract. An exception is if the partnership agreement permits a lesser number of partners to sign documents and bind the partnership.

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Key Takeaways

Changing your business structure from a sole trader to a partnership is an exciting step for your business. It is essential to know the people you will be conducting business with and how this new alliance will bring value to your business. This is particularly important with a partnership because each partner is individually liable for the actions of the partnership. For more information on the partnership structure, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a sole trader?

A sole trader is someone who conducts business in their own name and not through any separate legal entity. 

What is a partnership?

A partnership structure is when an association or group of individuals conduct a business together and share its profits and losses.

What are benefits to a business partnership?

A partnership allows you to share the liability and workload amongst several individuals. It can also be a strategic way to grow your business by involving other parties who may have additional skill sets, networks or capital for investment. 

Do I need a partnership agreement?

It is not compulsory to have a partnership agreement. However, it is better to draft one as this document will detail how you will share any profits and losses, and the overall rules of the partnership. It is best practice to include a dispute resolution clause that outlines the process for partner disputes.

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