As in all matters in every business will have a cycle and restructuring will be a necessity at various points in that cycle. There is no “one size fits all” option, but a common transition is from a sole trader or partnership to a corporate entity. Today we have a look at some of the issues involved.
There are many different aspects to consider and action in this transition. It can be the case that some of these may be overlooked. The following should be considered implemented to effectively and proactively transfer a business from a sole trader to a corporate entity:
- business name
- utility accounts
- taxation obligations.
If the business owns any physical or intangible assets, what should happen to these assets must be considered. These assets could remain with the old entity (sole trader) and then hired out to the new entity (company), or be transferred/sold to the new entity. If the assets are to be transferred/sold, a professional asset valuation must be undertaken and then proper consideration must be paid by the new entity to the old entity. Asset protection should also be considered.
If a business name is registered with the Australian Securities and Investments Commission (ASIC), then a business name transfer to the new entity is required. To transfer the business name with ASIC to the new entity, it may be that if the business name has value and that the new entity must pay consideration for the business name to the old entity.
All old debtors should be collected through the old entity—resist the temptation to collect them in the new entity. Any proceeds from the debtors can be used to payout the old entity’s debts and once collected the old entity’s customer accounts should be finalised.
New customer accounts should be setup in the new entity’s name and payments made to the new entity.
Any new contracts for work must be setup in the name of the new entity.
Any employees must be transferred to the new entity. This involves terminating them from the old entity and getting them to sign a new employment agreement under the new entity as well as completing new tax declaration forms and superannuation forms. Any accrued entitlements will transfer to the new entity. The detail of continuity of employment must be worked through.
Addressing the creditor position is critical for business owners to alleviate personal liability.
New accounts must be opened with all suppliers/creditors in the new entity and any old ones be paid out in full and closed. Otherwise, the potential risk is that debts will continue to accrue in the old entity’s name. In setting up new accounts in the new entity, the credit application must be carefully read and considered, particularly regarding any director’s guarantees and real property charging clauses.
Failure to set up new creditor accounts can leave the owner personally liable for the debts of the company.
Importantly, any lease for the business premises must be transferred/assigned to the new entity. Alternatively, a new lease can be entered into. Again, just like the supplier accounts, care should be taken when reviewing any of the new documentation being signed.
New utility accounts for power, phone lines etc. will need to be setup or transferred to the new entity.
A new Workcover policy must be taken out in the new entity that is now employing staff. Likewise, any insurance policies must be setup in the new entity and the old ones cancelled.
Significantly, the new entity must take all necessary steps to follow the Australian Taxation Office’s stringent requirements.
The ATO will require the new entity to register for the required tax obligations, including income tax, GST and PAYG. It may also be the case that the old entity can now cancel any GST or PAYG registration once final returns are completed and lodged.
Considering all these issues and acting upon them as required is vital as an asset protection strategy. we see instances where the company did not setup new creditor accounts and when the company failed, the creditors had the recourse to make a claim against the sole trader (old entity).
Seeking appropriate and qualified advice is vital for any sole trader considering setting up a new entity to ensure the process is undertaken correctly. The consequences of failing to set it up correctly can be costly.
Stamp duty will also apply in many circumstances and can be quite significant.