Growth is inevitable for a successful business, and sometimes your business can even outgrow the business structure it was created under.
In the past we’ve advised on starting your business with its ultimate structure in mind, but sometimes change is inevitable. And while it involves some legal hoops to jump through, it’s not necessarily a bad thing.
Grow your business with the right business structure in place. Our team of experts will help you set up the best structure for your goals.
Is it possible to change my business structure?
Businesses evolve over time, and the good news is that it’s certainly possible for you to successfully and smoothly change structures.
How to change business structures
Changing structures means you’re changing legal entities, which means you’ll need new registrations with the ATO, and potentially with ASIC. Here’s what you need to do.
- Create a new ABN and tax file number
- Create a new bank account for your new structure
- Update your customers and suppliers with your new bank details
- Update your invoices with your new ABN and bank details
- Ensure all contracts and agreements are signed under the new business entity
- Complete your business financials and tax return under the new structure
- Deregister the old structure (if necessary). This can be done online through the ASIC website
- Complete your final tax return
- Notify the ATO that you’re no longer trading under this entity
Why would I change my structure?
There may be a number of reasons for choosing to change structures.
Business growth
Your business may have reached a point where you’re diversifying, or you’re considering expanding overseas.
For example:
A sole trader is planning to incorporate a new product line and wants to bring on investors to help fund growth that this new line will bring. In this case, they need the ability to allocate equity ownership to investors, which a sole trader structure doesn’t allow.
Change of ownership
A change of ownership can occur because new owners are joining the business, or you have new investors who want to contribute.
- You may have recently bought a business, and you’re looking to change the structure of this new business to meet your financial goals.
- A business operating under a family trust structure can't have owners who aren’t part of the family. A change of structure will be necessary to bring in any outside owners.
Tax efficiency
You may be considering a change in business structure because you’re looking for increased tax efficiency within your current structure.
A business owner working under a sole trader structure would lose nearly half their profits in tax once they earn more than $180,000 in annual profit. In this case, it would make sense to change to a more tax effective structure.
Asset protection
As your business grows, so too does its complexity and level of risk. Changing structures can be beneficial in changing the level of risk that could directly impact the business owner.
For a sole trader whose business is growing rapidly, it may be beneficial to change the structure of the business to a company structure for asset protection purposes. This way any business liability is restricted to the business itself, and not the business owners or directors.
Economic downturn
Realistically, some businesses may be affected when economic downturn strikes, and changing their business structure is an advisable way to keep the business afloat.
For example:
A business operating as a company may see the need to downsize in order to remain in business, and the decision is made to change structure from a company to sole trader.
What are the tax implications of changing structures?
Prior to 1 July 2016 changing structures would trigger a capital gains tax event (CGT).
Since 2016, the Federal Government has introduced rollover relief for small businesses, enabling small business owners to restructure their business operations without triggering adverse tax implications.
To qualify for the rollover relief there are strict conditions that must be met. These include:
Being part of a genuine restructure. This means the restructure isn’t occurring in conjunction with the business owner winding down or selling their business. It also means that the change in structure isn’t taking place solely to avoid paying tax.
A genuine restructure would be undertaken to facilitate growth, innovation, and diversification of the business. It should also help to reduce administrative burdens, compliance costs, or cash flow burdens.
No change in economic ownership. The rollover relief is only available if there is no material change to the underlying ownership of the business. This means that a change in structures can’t bring in new owners to the business (without triggering a CGT event).
For example, a sole trader changing to a trust or a company structure wouldn’t be likely to trigger CGT if they were the sole owner of the new trust or company.
Note that the legislation uses the term 'material change'. This means there may be scope for minor changes to ownership.
Important things to consider before changing business structures
Timing
It can make sense to start a new business structure at the beginning of the financial year, so that you’ve got a clean slate from day one, and take comfort that the old structure has been officially closed out.
However, if you’re looking to restructure your business at any point during the financial year, it makes more financial sense to do so sooner rather than later. This way you can begin to take advantage of the new structure and any tax efficiencies right away.
What are you planning for your old structure?
When you change structures you also need to consider what you’ll do with the old structure. Are you going to close it down, and cease to trade under that structure entirely? Or will you continue the structure for other business purposes?
Tax
Are you changing the owners of the business? If so, you need to be careful as this can trigger a CGT event.
How far ahead have you planned for the new structure?
When changing business structures, you need to think carefully about what your new structure will be. It’s essentially the same as when you first set up your business: you need to consider both the immediate and long-term implications of each structure, and what this means for your business.
Give your business the room to grow
Businesses are constantly evolving, and at Liston Newton Advisory we can help you keep your business on the right path to accommodate any structural change that may be required.
Our expert business structure consultants will work with you to understand your goals, both for the short term and long into the future, and help you choose the structure that’s going to enable future change, and growth.
