If you are considering restructuring your business, you could be doing so for multiple different reasons. However, the main reason a lot of people restructure is to reorganise the current governance of their business. This can have positive impacts on profitability, improve processing, as well as, adapting to your changing business needs.
Read our guide below explaining the important things to consider before you restructure.
Types of Business Structure
There are three main types of restructuring that business owners consider:
- Sole trader to company
- Sole trader to partnership
- Partnership to company
This is the first step, as it is important to note the benefits of each type of structure to know which one is best suited for your needs.
Sole Trader
As a sole trader, you are legally responsible for all the different aspects of your business. This allows you to have complete control of all assets and business decisions. This is the simplest type of business structure and is easy and inexpensive to set up. It also gives you the choice to hire staff, if needed.
Partnership
A partnership requires two or more people who decide to distribute any losses or income between themselves. Partnerships are also quite easy and relatively inexpensive to set up, as opposed to other structures. Additionally, it allows the partners to share business decisions and work together as opposed to a sole trader having to make all the decisions for themselves. There are three types of partnerships that you may want to look into:
- General Partnership
- Limited Partnership
- Incorporated Limited Partnership
Company
A company is a separate legal entity, unlike a business. A company has the same legal rights as a natural person with regards to incurring debt and the right to sue and be sued. As a member of a company, you are not liable for any form of company debts. However, there may be instances where you will be liable if found in breach of any legal obligations. It is important to keep in mind that a company is expensive and complicated to set up. If you need advice, speak to a company lawyer.
Trust
The way a trust works is; an individual (the trustee), has an obligation to hold assets or property for the benefit of others (beneficiaries). As a trustee, you are legally responsible for the operations of the trust. Again, it is important to keep in mind that a trust is expensive and complicated to set up. If you have any questions, speak to a trust lawyer.
Ensure your Business Plan Reflects your New Business Structure
Every single business should have a business plan. They help to set out your goals, monitoring progress and visualising how each aspect of your business will work together. This is especially important if you plan to restructure, as it will allow you to ensure that your visions for your business align with the new structure.
Changing your ABN
Depending on the type of business structure you choose, you will have to change your ABN accordingly. If you are changing to the following structures, you will need to cancel your current ABN and apply for a different one:
- Individual/sole trader to partnership or trust
- Individual/sole trader to company or trust
- Partnership to company or trust.
Further, once you have applied for a new ABN, make sure to change it on all your invoices and documents.
Changing Trademarks and Business Names
When restructuring, there are some technicalities to consider with regards to trademarks and business names. If you are changing any of your trademarks, you must contact Intellectual Property Australia. Further, if you are planning to change or transfer your business name, you must do this through ASIC.
Check Over Partnership Agreements and Corporate Governance Structures
During your restructure, if you wish to add any stakeholders, you must outline the terms and conditions to each of them. This includes things such as percentages of ownership, responsibilities, decision making and so forth.
Tax Obligations
Changing your business structure could mean that your tax obligations will change alongside it. Further, the way you report your tax might change as well. However, this depends on the business structure you choose. The Australian Taxation Office (ATO) outlines the different obligations that you must fulfil depending on your business structure.
Conclusion
Changing your business structure provides great opportunities for profitability and process improvement. However, there are a number of things that you must consider before doing so. The main consideration you should keep in mind is to get legal advice if you are unsure about anything. If you need any further help or advice, speak to a business lawyer.
