When Should I Transfer My Small Business to a Company?
Successfully starting a business and surviving the first few years can be tough. But make it and you will most likely enjoy a period of growth.
Often during this phase, a small business will want to take a step up to form a fully-fledged company. It’s not just about appearances, though – there are many important benefits to forming a company, including tax benefits, reducing personal liability and a more flexible ownership structure.
Read on to learn more about why transferring to a company can be a good move, and how to do it.
Benefits to a Company Structure
Under commercial law, a small business has ‘unlimited liability’ while a company has ‘limited liability’.
When you have unlimited liability, you and the business are seen as one-in-the-same. This means that any legal fines, debts and liquidations can also target your personal finances and wealth.
A company’s assets and finances are considered the independent property of the company, and not of the owner/directors. This means that debts and liabilities are also isolated to the company. If the company is sued and/or goes bankrupt, your home and personal finances will be safe. The tradeoff is that, as a director, you must go through a more formal process when making business decisions, documenting them and ensuring consensus (if there are multiple owners).
Sole traders are effectively self-employed employees. In a way, the business is their ‘job’ and thus business revenue is taxed like your wage – as personal income tax.
A company’s taxes are separate to owner’s taxes and are subject to a flat corporate tax rate of 30%. Owners are then granted some flexibility in choosing what money gets put back into the business and what benefits the company will provide. This can provide some opportunities to more efficiently reduce your personal income tax rate.
Broaden the Brand
Transferring to a company is also an opportunity to broaden your brand.
Your company can have a new name that represents a broader image of your services, and allows you to expand with additional trading names in the future. For example, the business ‘Jim’s Mowing’ grew from a small lawn mowing business into a company. The company was named Jim’s Group; and now includes various business trading names including Jim’s Mowing, Jim’s Computer Services, Jim’s Painting and even Jim’s Dog Wash.
How Do I Transfer My Small Business to a Company?
Decide on Ownership
Transferring to a company is an opportunity to bring on more owners. A company is run by a board of directors who can be changed without affecting the existence of the company. Furthermore, ownership of the company can be clearly divided based on shares, giving you more control over how much each owner owns.
Incorporating the Company
There are a number of different company structures available, but generally, the most appropriate structure to use will be a private limited (proprietary limited, Pty Ltd.) company. Other structures, such as public companies or a private trust are usually used in specific circumstances. It is best to have a legal advisor consult with you on which structure best suits your needs.
You will also need to register an ABN and choose a name for the company. It can be the same name as the business you’ve been trading under as a sole trader but it doesn’t have to be. In most cases, the old small business ABN will be cancelled and replaced with the new company ABN.
Transfer Employees and Assets
Many small businesses don’t have many assets, but if you do they can be a complex matter due to tax considerations. It’s important to discuss such a transaction with an accountant or a tax lawyer.
If you have any employees, you will also need to transfer their employment to the new company. This means entering into new employment contracts with each employee, with your company as the employer.
The steps involved in transferring a small business to a company structure are relatively simple. However, there are a number of complex considerations, such as planning for tax, selecting the best business structure, and drafting ownership and shareholder agreements.
If you are taking the step up to corporate business, it’s important to get good legal advice. We understand how important your business is to your world. When you walk into our Eastern Melbourne firm, you will be greeted by a friendly face and the advice of a professional solicitor.
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