Starting out your own business can be the scariest decision you will ever make, but when done correctly, it can turn out to be best. While there are numerous factors surrounding the failure and success of any business, a crucial one that is commonly overlooked is the business structure.
Choosing the right business structure can be quite a tricky business itself. The three most common business structures include Sole Tradership, Partnership and Company. Each if this structures has its own advantages and disadvantages. Today, however, we will focus on the risks of having a wrong business structure and the ins and outs of how to change your business from a Sole trader to a Partnership in Australia.
The risks of having a wrong business structure
Quite often, budding entrepreneurs give very little thought the type of business structure that is right for them until they are confronted with multiple complications a few years later when changes need to be made. Here are some of the consequences of having a wrong business structure.
Taxation: Tax liability is calculated differently in each of the business structures. Some of the taxation considerations in Australia include tax on profits, municipal and water rates, land tax, payroll tax among others. Choosing a wrong business structure could see you paying more than you should in taxes and this could slow down or cripple your business growth. Additionally, any profits made during the transfer of items from one business structure to another may attract additional taxation.
Administration Costs and Business Interruption: When you have to change your business structure, there are several costs involved that could have simply been avoided by choosing the right business structure in the first place. The legal and accounting fees incurred during transition from your current business structure to a new structure may vary from one thousand to tens of thousands depending on the level of advice you need and your structural choice.
Generally, your new business structure will have its own Tax File Number (TFN) and Australian Business Number (ABN). This means that you will need to set up new bank accounts and update all the agreements with your staff, customers and suppliers.
Changing from a sole trader to a partnership
Sole trader, also known as sole proprietorship, is the simplest structure. You generally don’t need to pay corporation tax or register with Companies House. Additionally, the control and management of the business, as well as the financial responsibility is in your hands.
However, there are some risks involved in the sole trader business structure that makes most people want to change to partnership structure.
First, the legal reasonability of the business lies squarely on you; this leaves you much more exposed to greater risk as compared to other structures.
Secondly, as a sole trader, you are not seen as separate from your business. This means that if the business gets into debt, you risk losing your personal savings, home or any other assets inside and outside the business.
Lastly, it’s difficult to raise funds as a sole trader; this makes it hard to rapidly expand your business.
On the other hand, a partnership business structure has more than one owner, and hence the risks and liability are split among the partners. Partnerships are easier to form, run and fund compared to a sole trader. At the same time, they are also less strictly regulated compared to companies.
When changing your business structure from a sole trader to a partnership structure in Australia, there are few basic things that you will need to do. These include;
- Drafting a business plan for your new structure in place
- Applying for a new Australian Business Number (ABN).
- If you are changing any registration logos or trademarks, contact IP Australia.
- Draft a partnership agreement and cooperate governance structure.
- Consult with the Australian Taxation Office (ATO) to find out how the new changes will affect your tax obligation.
- Don’t forget to notify relevant authorities of your new registration details
If you have any feeling that you need to change your business structure, chances are you ought to have done that ages ago. Waiting for too long to change your business structure may do more harm to your business and cost you even more. However, before you make this very critical decision, be sure to consult properly with a business advisor such as Femia Accountants.
Contact our office today on 9316 4500 or book a time to meet with us.