Your Guide to Changing Business Structures

Why change business structure?

Committing to a change in business structure often indicates your desire to re-organise the governance structure of your business. At this point you should be able to answer the question of why you’re changing business structure. 

It’s important to know your motivations for making this decision. Is it to be more profitable? Is it to improve your business processes? Or is it to adapt to the changing needs of your business? 

For many small business owners, a structure change is triggered by new owners or investors joining the business. Indirectly it could also come about when a prospective lender asks to review a formal business plan before approving finance; the review is designed to give the lender insight into your future direction, so if a structure change has been mooted you may decide now is the time to make it happen.  

Another advantage of switching to some of the more complex business structures is the legal protections and potential tax options that become available. For example, in addition to the liability that comes with having employees, your business may be liable for loans, injuries to customers, and a number of other issues. By switching to a more formal business structure, you may be able to better protect your personal assets from such liability. 

In short, changing structure can deliver positive business outcomes — as long as you tick all the appropriate boxes.

Below are some common reasons to change your business structure.

• Change in management — If you take on a business partner, you may decide to change from a sole trader to a partnership business structure. 
• Change in ownership — If you buy an existing business, you may decide to change the business structure in line with your plans and objectives. 
• Financial considerations — You may restructure the business for financial reasons, such as looking to boost cash flow or increase profitability.
• Operational factors — You may reorganise your internal functions (e.g. HR, finance, marketing or production) to improve the day-to-day running of the business.
• Business growth — If your business has expanded or changed its offerings, a restructure might be necessary to accommodate this growth.

Common business structure changes

There are different types of business structures in Australia, including:

• Individual / Sole Traders (with or without an ABN) — A sole trader is legally responsible for all aspects of the business including any debts and losses and day-to-day business decisions. 
• Australian Partnerships — A partnership is a business structure made up of two or more people who distribute income or losses between themselves. 
• Australian Companies — A company is a separate legal entity that allows you to conduct business throughout Australia. 
• Australian Trusts — A trust is a structure that allows a legal entity such as a company to hold assets to the benefit of others. 
• Australian Incorporated Associations — An incorporated association has its own legal identity separate from its members.
• Australian Government Entities — A corporate government entity is a body corporate that has a separate legal personality from the Commonwealth (e.g. the National Library of Australia). 

The limitations of one particular business structure often inform the shift to a new, more appropriate structure. For example, as a sole trader you could decide to take on a business partner or register as a company because your growing business now owns assets, or you’re concerned about protecting your personal liability. Alternatively, you might look to change business structure from partnership to company when you decide to hire employees. Meanwhile, certain types of businesses — such as a charity or not-for-profit organisation — may need to change structure to a trust, incorporated association or government entity. The business will then need to meet the regulatory requirements and governance standards of the relevant structure. 

Here are three of the most common business structure changes. 

1. Sole trader to company — As your business grows, it’s possible your sole trader business structure will become limiting or redundant. In this scenario, a company business structure could be more appropriate. 
2. Sole trader to partnership — To bring a partner into your business, you must apply for a new ABN. Both parties will then need to abide by certain terms and conditions in a partnership agreement. 
3. Partnership to company — You cannot transfer your partnership into a company, so converting from a partnership to a company means first dissolving the partnership then setting up the company. 

Important things to consider

Although the process itself can be relatively straightforward, changing structure is a major milestone for any business. It is not a step to be taken lightly. Before you set about changing your business structure, you should understand that any transition can have significant implications for your business as well as its clients or customers. 

Legal, tax and reporting obligations

You will need to weigh up all of the implications — whether favourable or unfavourable — to your legal, tax and reporting obligations, as well as other business registrations. A change of business structure may impact the tax you pay or how you will be expected to report your tax to the ATO. 

Note, for example, that individual states and territories govern partnership laws. This means you will need a firm understanding of your partnership’s legal, tax and reporting obligations in your specific state or territory. 

Terms and conditions

As is so often the case, the devil is in the detail when it comes to implementing a new business structure. It’s vital to have effective terms and conditions in place to mitigate potential risks from the beginning — particularly in relation to customer transactions and disputes. And if you’re adding stakeholders to your business, make sure the terms and conditions — including percentage of ownership, decision making, liability and responsibilities — are clear to all parties. 

Professional support

Given the responsibilities and expectations mentioned above, there are some crucial people to have on your team as your business continues to grow. 

First, it’s a good idea to seek relevant support and advice from an accountant, solicitor or lawyer before you set about changing the structure of your business. If and when you go ahead with the change, it would be wise to engage the help of these professional services. If you have an internal finance department, they should of course be consulted as well. 

Key questions to ask yourself

Here are some key questions when restructuring your business. 

• What are the pros and cons of each business structure, and which best suits your business and its unique circumstances?
• A business plan is critical to achieving your business goals — especially following a restructure. Are you implementing a successful business plan for your new structure?
• Do you need to apply for a new ABN?
• Do you need a new business name or trade mark?
• In the case of companies and trusts, do you need any other agreements in place?

Merchant services for growing businesses

Finally, when it comes time to change business structure, you will want to rely on a merchant services provider able to support your growing business with an integrated payments and financial services solution. 

With Zeller it will always be easy to accept payments, manage your finances, and pay recipients fast. Zeller makes it simple to sign up online — most businesses can do it in under 5 minutes.

To fully prepare your business a change of legal structure, schedule time to speak with your accountant or financial advisor. Please note this article is for educational purposes only and does not constitute advice.