Changing your business structure from a sole trader to a company is a significant step that many businesses take as they grow. Starting as a sole trader is often a simple and cost-effective way to begin, but transitioning to a company can offer numerous advantages, including limited liability, a more professional image, potential tax benefits, and opportunities for growth and investment.
To facilitate this restructure, here are the essential steps you need to follow:
- Determine Company Stakeholders: A company has two main stakeholders: officeholders (directors and company secretary) responsible for daily management, and shareholders who own the company’s shares. Decide who will fill these roles, which might initially include you as the sole director, secretary, and shareholder, with room for expansion as your company grows.
- Understand Tax Implications: Moving to a company structure involves selling your business to the new entity, i.e., the company itself. If your business has significant value, seek financial and tax advice to understand how much the company should pay to purchase the business and the tax consequences of the transition. Be aware of potential tax relief options during the restructure.
- Incorporate the Company: Incorporate your company, most likely as a proprietary or private company. During this process, you will need to provide details to ASIC, including the company name, registered address, principal place of business, shareholder information, and officeholder details. After incorporation, register for an ABN, TFN, GST (if applicable), and PAYG (if you have employees).
- Transfer Business Assets: Depending on your business’s assets, you may need to transfer them to the new company. Notify IP Australia of any changes to patent, trademark, or design registrations. Use sale agreements, IP assignment agreements, and other appropriate contracts to transfer ownership of assets, registered business names, and domain names to the company.
- Update Contracts: If your business has contracts with third parties (employees, suppliers, clients), you must update or re-enter them because the company, not you as a sole trader, will now represent the business. Inform relevant parties about the transition and consider novating or assigning existing contracts to the company or entering new ones.
- Review Business Insurance: Inform your insurance provider about the change in business structure to ensure proper coverage under the company arrangement.
Key Takeaways:
Restructuring from a sole trader to a company offers long-term benefits for your growing business. However, the process can be complex in terms of legal, administrative, and tax aspects. It’s crucial to have a clear understanding of how the company structure operates and the necessary steps to transfer your business successfully.
Please note that this information serves as a general guide and should not be considered as official advice. For specific and personalized assistance with your business restructure, we recommend consulting experts in the field. Book a call with us here.
