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A change in business structure often means that you want to re-organise the governance structure of your business. Usually, you do this to be more profitable, improve processes and adapt to the changing needs of your business.

A business structure is often the first change you make when your business grows. Particularly, if you start as a sole trader and then want to take on a partner or register as a company.

When you change your business structure, you need to understand your reasons for this change. A business structure change can have implications for your business’s legal and tax obligations as well as your personal liability.

Common business structure changes

Businesses often change their business structure in similar ways. The most common business structure changes are:

  • sole trader to company
  • sole trader to partnership
  • partnership to company.

Sole trader to company

As your business grows, you may outgrow your sole trader business structure. If you hire employees, take on an investment or own assets, a company structure can protect your personal liability. A company is a separate legal entity.

Sole trader to partnership

If you decide to bring a partner into your business, you’ll need to apply for a new Australian business number (ABN). You should consider a partnership agreement to understand how your partnership will run and what intellectual property (IP) transfers you need to make. Your partnership agreement will have certain terms and conditions that both parties need to abide by.

Legislation that governs your partnership is state-specific. Make sure you understand your partnership’s legal, tax and reporting obligations.

You may want to you seek advice from an accountant, solicitor or lawyer before making this change.

Partnership to company

To convert from a partnership to a company, you need to dissolve your partnership and set up your company. You cannot transfer your partnership into a company.

Reasons to change your business structure

A few common reasons to change your structure include:

  • Change in management - You may take on a business partner, and decide to change from a sole trader to a partnership structure.
  • Change in ownership - If you buy an existing business, you may decide to change the business structure to meet your goals for the business.
  • Financial reasons - You may restructure to meet financial goals and objectives, such as improving cash flow or profitability of the business.
  • Operational reasons - You may reorganise your internal functions, such as sales and marketing, to improve the way your business operates.
  • Business growth - Your business may now operate in overseas markets or the business expanded or changed its product functions and you need to change your structure to accommodate this growth.
  • Economic downturn or downsizing - You may want to downsize or simplify your business structure, for example moving from a company to sole trader.

Questions to consider when you restructure

Consider the pros and cons of each structure, and decide on a business structure that best suits your business and situation.

You need to ensure your business plan reflects the new or proposed structure, and outlines the goals and objectives of your business.

Most changes to your business structure will require a new Australian Business Number (ABN). Visit the Australian Business Register website to find out more.

You will need to contact IP Australia if you’re changing any registered trademarks or logos. You will also need to transfer your business name or cancel your business name with Australian Securities and Investments Commission (ASIC).

If you’re adding stakeholders to your business it needs to be clear to everyone what the terms and conditions are, such as percentage of ownership, decision making, liability, responsibilities etc.

You may need to look over other agreements to prepare for your business structure change. This is particularly important in the case of companies and trusts.

Contact your accountant or search for a business adviser or expert if you’re unsure.

A change of business structure may affect the tax you have to pay or how you report your tax. The Australian Taxation Office (ATO) can help you understand how your business structure affects your tax and the implications of incorporating your business.

If you wish to change structures and keep running the business as a sole trader, you will need to apply for a new ABN for your business and if you want to keep the same business name, you will need to transfer the business name to yourself. Seek professional advice to help you understand what you need to transfer.

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