When running a business, it’s important to ensure that your trading structure remains suitable for your current circumstances. This structure refers to your legal framework for income tax purposes, which can include options such as sole trader, partnership, family trust, unit trust, or company.
There are several reasons why your business structure may no longer be ‘fit for purpose’. Here are some key factors that may prompt the need for change.
Reasons for Changing Business Structure
Changes in Revenue
If your business has grown significantly or experienced a decline in revenue, the current structure may not offer the most advantageous tax benefits outcomes.
Altered Business Goals
A shift in your business objectives, such as expansion, diversification, or entering new markets, may require a different structure to optimise operations and tax efficiency.
Increased Complexity
As your business evolves, it may involve more stakeholders, assets, or operations. A more complex structure might be necessary to manage these changes effectively.
Liability Protection
If your business is exposed to higher risks, transitioning to a structure that provides better liability protection, like a company or trust, may be essential.
Investment Opportunities
If you are seeking external investment or partnerships, certain structures may be more appealing to investors, necessitating a change to attract funding.
Succession Planning
If you are considering transferring ownership or planning for retirement, a different structure may facilitate smoother transitions and estate planning.
Tax Efficiency
Changes in tax laws or your financial situation may render your current structure less tax-efficient, prompting a review and potential restructuring.
Regulatory Changes
New regulations or compliance requirements might require adjustments to your business structure to remain compliant within your regulatory framework.
Personal Circumstances
Changes in your personal life, such as marriage, divorce, or changes in financial status, can impact your business structure’s suitability.
Profit Distribution Needs
If your profit distribution needs have evolved, it may be beneficial to reorganise to better align with your financial goals and stakeholder interests.
It’s important to note that changing your structure often triggers a capital gains tax event for the original operator of the business. While this means there may be initial costs involved, the long-term benefits could outweigh these expenses.
Practical Points to Address When Changing Structures
If you decide that changing your business structure is the right move, here are the main practical points you need to consider:
New Bank Accounts
The new trading entity will require its own bank accounts. This separation is vital for proper financial management.
Updating Stationery and Marketing Material
With a change in your legal name and Australian Business Number (ABN), all your stationery and marketing materials must be updated accordingly.
New Industry Registrations
Depending on your industry, you may need to register your new entity with relevant authorities, such as the QBCC or Office of Fair Trading.
Inform Your Insurance Company
It’s essential to notify your insurance provider about the change in your trading entity to ensure you remain covered.
Create a New Xero File
For businesses that use accounting software like Xero, you’ll need to create a new file for the new entity. Assistance with exporting setup data from your old Xero file can be very helpful.
Change Employment Agreements
Any staff members will need to have their employment agreements transferred from the old entity to the new one.
Timing the Change
Changing your trading structure shouldn’t be rushed. Careful consideration should be given to the timing of the change, ideally aligning it with your Business Activity Statement (BAS) reporting periods. This strategy will help minimise duplication in reporting to the Australian Taxation Office (ATO).
While the process of changing your business structure can seem daunting, it is often necessary for the growth and sustainability of your business. By addressing the practical aspects and timing your transition wisely, you can pave the way for a more efficient and effective business structure moving forward.
If you think it’s time to re-evaluate your business structure, don’t hesitate to reach out and start the conversation here.
