Have you got an established business as either a Sole Trader or Partnership and your Accountant has suggested you transition to a Company structure?
Now, the reasons why they’ve suggested the switch might be for very good tax reasons.
We see many Tax Accountants are keen to help you with your tax strategies but they’re not always what we call “commercially experienced”. This may result in disaster for you and your business.
Common benefits of a transition to Company
Now, don’t get me wrong, transitioning to a company has many benefits primarily:
- it’s a separate legal entity from you (and your business /family partner if you have one); and
- asset protection (eg the family home); and
- the tax structure; and
- expansion and financial growth opportunities.
But before you make the switch, there’s a few things to consider aside from Tax and Asset protection methods.
First, let me tell you a little story…
A decade ago, my brother (a Fitter) demanded that if I was to ride motorbikes, I had to learn how to look after them first.
If I wanted help buying my first motorbike, I had to agree to learn the basics of bike mechanics. I had to pull my bikes apart and clean them up each time I bought a ‘new’ one. This ensured I understood how they worked and how to do basic service.
The thing is, unlike my big brother, mechanics truly isn’t my forte and isn’t something I enjoy. I am not skilled, and I’d go about everything the longest most complicated way on earth!
Generally, I’m trying to get the job done quick so I can get back to riding. Inevitably, I’d forget all the little things that make the job easier in the long run.
You know, like those little things that if forgotten cause the most pain (and lots of swear words)??
For me, the pain of these forgotten little things used to be horrific. You see, when I first started riding bikes, I lived in Sydney. My only other alternative transport to go buy those forgotten bits was my pushie or public transport.
Where I lived versus spare parts shop – both were terrible alternatives. Needless to say, as soon as my brother moved to Mudgee, I found me a shop to do my services!
Fast forward to 5 years ago when I moved to the Upper Hunter. I secretly thought you beauty! Because well, Steve is a Motorcycle Mechanic. My life would now be complete right?!?!
Unfortunately for me, I soon learned Steve has a very similar thinking to my brother. I must understand my machines.
The first time I was in Steve’s shed, I did a “Steeeeeve I don’t have one of those new filter thingies” as I was doing an oil change. I got a little (ok a BIG) lecture on 7P’s of Planning – I’m sure you know it…
Proper Planning and Preparation Prevents P!ss Poor Performance!
The point of this story??
You’ve already started your business with one structure that you’ve outgrown, and we know from my story, that it will be the little things that if not thought through that will cause the biggest pain.
And like Steve’s lecture, the 7P’s of Planning is essential to a smooth transition.
What are the little painful things for a Company Transition?
Before we make the plunge to move towards a Company transition, I want for us to stop and first think about all the little things that could trip us up (like my lack of a new oil filter).
Questions we see people overlook during this process include:
Q Do you require a special licence or registration to operate your business?
Sometimes, business operators need a special licence or registration to operate their business – this is especially the case for regulated industry or Trade. This might be:
- Builders Licence
- Motor Vehicle Repairer Licence
- Electrical Services Licence
- Real Estate Licence
To name a few. Most of these will require you to have a licence as an individual as well as for the trading entity (the Company). You won’t be able to transfer this over simply. You will need to check with your regulatory body.
Q: Do you have any equipment on finance in the partnership / sole trader
This might cause a problem if you move to a Company as the old ABN’s won’t be earning an income. This means you’ll need to account for this transition by keeping the old ABN’s open until finance is paid off.
The alternative is to move finance leases to the Company. However, this is often times costly, and in some instances, causes stamp duty and refinancing costs to be incurred.
Also, if there are Personal Property Security Registers (PPSR) registrations, they’ll be against the Sole Trader / Partnership name rather than the Company (who is now using the assets to build an income).
Q: Do you have a rental agreement in place with your current place of business?
If you have a rental agreement or commercial lease, often times there is a clause excluding sub-leasing. Many landlords are OK for you to keep your existing lease but use it for your Company.
However, legally, you are still personally bound and liable by the lease as it is in the Sole Trader or Partnership. This means, if the Company fails to thrive and doesn’t pay its debts, you are still legally liable to pay the rent in your personal name(s).
Q: Are you likely to want to refinance your home / buy new property in the next 2 years?
The big banks generally request 2 years of Company financials before you are allowed to request refinancing / ability to buy a new property.
If refinancing or buying a new property is likely to be on the radar, we need to sort this out first. Banks need 2 years financials from incorporation (registration / setup) date. Even if you take a while to get it up and running!
Q: Are you likely to want the business to be your primary income in the near future?
This is particularly important if your business is what I call a ‘side hustle’ a little way of making extra cash on top of your salary and wage.
If you are looking to operate 100% through your business (and give up your job) then moving to a company might be a good option for you. This is because operating as a Company provides many more options for optimising your tax.
If however, you want to keep the business as what I call a ‘side hustle’ then, maybe a Company is a level of complexity you don’t need or want.
Q: Do you own a lot of assets in your personal name?
If you own property and valuable assets (eg motorcycles), having a company is a perfect for protecting your personal wealth from the business operations.
However, there are a few rules to follow to ensure you’re doing the right thing, and are protecting those assets. One major factor in changing to a Company is the significant change in mindset related to money.
You see, operating a partnership and Sole Trader effectively means that all the money in the bank accounts after you pay your bills belong to you and your business partners. You can draw it out as and when you like.
Company bank accounts belong to the Company, and the only way you can access that money on a day to day basis is by drawing a wage (that the Company pay’s Superannuation on and withholds tax).
This change in mindset we find, is the biggest hurdle for small business owners making the transition to Company.
Q Are you generating a lot of profit and growing rapidly?
If you are generating a lot of profit and growing your business rapidly, a Company might be only one aspect of the business structure change you should implement. You may also need a Family Trust which is a structure that allows you to distribute income to members of your family.
If any of the questions above have raised questions for you please give us a call on 02 6543 1219. Alternatively you can book in a “Start-Up Smart” consultation with Jewlz, our Queen Calculator here
I hope that this accidentally long blog post is of value to you as you navigate the complexity of changing business structures to a Company! If so, please share on social media with your like minded friends!