Restructuring From Being a Sole Trader

How you structure your business will directly determine some of the most fundamental elements of your operation. While many small businesses start off their existence as sole traderships, a time will come when some will consider changing their business structure to that of a company or partnership.

Firstly, it is important to understand the key points that are affected by changes to the business structure. These are:

  • Tax liability
  • Asset protection
  • Your exposure to personal liability
  • Filing and paperwork requirements

As a sole trader there is no buffer between yourself as an individual and the actions of your business. This means that your personal assets can be placed at risk. Likewise, all income generated from your business will be taxed at your individual tax bracket.

Common Benefits of Restructuring as a Company

  • In terms of tax mitigation, being structured as a company will limit your top tax exposure to 28.5%
  • The company is its own entity, divorcing your personal assets from situation in which the company might incur liability.
  • Losses incurred by the business can be carried forward to offset future profits for an indefinite period of time.
  • As a company you can raise capital from outside sources by selling shares in your company.
  • Profits can be retained within the company to facilitate its growth.
  • Being its own entity, the company has perpetual succession.

What to Keep in Mind When Restructuring From a Sole Trader to a Company

If you decide that the benefits derived from being structured as a company would benefit your business, there are certain things to keep in mind.

  • Restructuring a business will result in having to obtain a new Australian Business Number (ABN).
  • Your company will require a constitution, otherwise its operation will be dictated by the replaceable rules contained within the Corporations Act of 2001.
  • Tax reporting requirements will change.
  • If you already have a business name, you will need to transfer this to the company via the Australian Securities & Investments Commission (ASIC).

The Thing About Partnerships

Some sole traders that are not interested in restructuring as companies may — for operational or financial reasons — wish to structure themselves as a partnership. For these circumstances it is essential to understand what a partnership actually is and how it differs from both a company and a sole tradership.

  • A partnership can be either a general or limited partnership. A general partnership makes all partners equally responsible for the operation of the business. The general partnership is not its own entity, therefore, the partners have no liability protection for their share of the partnership’s liabilities.
  • If the annual turnover for a partnership is over $75,000, it must register for GST.
  • You cannot be an employee of your partnership. Each partner is responsible for their own superannuation.
  • Even though the partnership does not pay income tax as an entity, it must still file an annual partnership tax return with the Australian Tax Office (ATO).

Each business has its own set of nuances. As such, what business structure is best for each enterprise will depend on carefully analyzing their individual circumstance — hopefully with the advice of a professional accountant. Once a particular business structure has been selected, it is important to continue with the professional counsel of an accountant such as Femia Accountants in order to ensure that all of the minutiae in terms of filings and regulations are adhered to when undergoing the restructuring process.

Contact our office today on 9316 4500 or book a time to meet with us.