When it comes to choosing the right business structure for your clients, there are several crucial considerations, especially when it comes to taxes, compliance requirements, and safeguarding the interests of business owners. The primary goal is to protect their personal wealth while minimising risks and exposure. Sole traders make up a significant portion of small businesses, accounting for 31% according to ABS statistics. However, recent challenges have prompted many sole traders to reconsider their business structure, particularly due to the substantial personal liability they face for all business debts, including tax obligations. If you’re thinking about transitioning your business from a sole trader to a company structure, the following information will guide you through the essential steps to ensure a smooth transition.

Taxation Obligations

One of the most critical aspects of transitioning to a company structure is understanding and complying with the Australian Taxation Office’s (ATO) stringent requirements, rules, and guidelines. The new entity must register for all necessary tax obligations, including income tax, GST, FBT, and PAYG. After completing and lodging final returns, the old entity may be able to cancel any GST or PAYG registrations. It’s crucial to have a clear understanding of what you can and cannot do within a company structure to avoid potential tax issues.

Assets

If your business owns physical or intangible assets, you must decide whether these assets will remain with the old entity (sole trader) or be transferred or sold to the new entity (company). Seeking professional tax advice regarding asset transfer or sale is essential. If transferring or selling assets to the company, consider obtaining an asset valuation. The valuation amount, known as proper consideration, should be paid by the new entity to the old entity. Ensure that the transaction is well-documented, and if the assets are sold on credit or vendor finance, register a security interest in the assets on the Personal Property Securities Register (PPSR) or with land titles for real property. Don’t overlook intangible assets such as business names, domain names, phone numbers, emails, trademarks, and patents during the restructuring process.

Debtors

All old debtors should be collected through the old entity rather than the new one. Any funds collected from these debtors can be used to pay off the old entity’s debts. Once collected, finalise the old entity’s customer accounts and set up new customer accounts in the name of the new entity for future transactions. Any new contracts should also be established under the new entity’s name.

Employees

Transfer any employees associated with the sole trader structure to the new entity. This process involves terminating them from the old entity and having them sign new employment agreements under the new entity. Ensure that they complete new tax declaration forms, and any accrued entitlements should transfer to the new entity.

Suppliers/Creditors

To mitigate personal liability, open new accounts with suppliers/creditors in the name of the new entity and close old ones. Be diligent when reviewing credit applications, paying special attention to director’s guarantees and real property charging clauses. Conducting a search on the PPSR can help you identify supplier accounts with registered securities against you as the individual (sole trader).

Landlord

Transfer or assign any leases for the business premises to the new entity, or enter into new leases if necessary. Be cautious when reviewing new lease documents, as landlords may use this opportunity to modify rental terms or introduce new conditions.

Utility Accounts

Set up or transfer utility accounts for power, phone lines, and other essential services to the new entity. Remember to consider the intangible value of phone lines and other assets when transferring them to the new company.

Workcover/Insurance Policies

Take out a new Workcover policy in the name of the new company entity, which will now employ staff. Accurate reporting of wages to Workcover is crucial to avoid costly penalties. Additionally, ensure that all insurance policies are set up in the new entity’s name and cancel any previous policies associated with the sole trader entity. Consult with your insurance broker to ensure your coverage meets your needs.

Director IDs

If you plan to become a company director, apply for a director ID before your appointment. Your authorised tax, BAS, or ASIC agent can assist in determining whether you need to apply, but the application itself must be completed through your myGovID account.

Transitioning from a sole trader to a company structure is a significant step that requires careful planning and execution. Ensuring compliance with taxation obligations, handling assets, debtors, employees, suppliers/creditors, leases, utility accounts, insurance policies, and director IDs is crucial to safeguarding your business and assets. Seek professional advice to navigate this process successfully and protect your wealth effectively. Before you make the leap to incorporate, make sure to address all the key points mentioned above and consult with experts who can guide you through the transition and asset protection strategies.

Remember, thorough and meticulous planning during this transition can prevent costly mistakes down the road, ensuring your business thrives under its new structure.

Call team Journey2 to discuss your restructuring options.