When you change your Australian business structure, for example, move from being a sole trader to a company, there is quite a bit you need to do. It’s not as simple as ‘just ask your accountant’ and then add Pty Ltd to your Xero invoice. In fact, don’t do that second part – I’ll explain more further down. A move in structure is a completely new entity; that means a new data file (Xero, MYOB. Quicken etc), plus many other steps. Here are a few things to think about and action … and if you’re a business coaching client of mine; then access a free checklist which is very detailed.
Changing Business Structure
- Before you even decide to change or say to your accountant “set up a company for me please”, there are many considerations first. I do appreciate that the cost can impact on the decision, but more so, you should be considering why you’re changing, and understand clearly what the pros and cons are of the change. Sure, Sole Traders are very simple and more cost effective in the short term, but often a company affords you asset protection along with lower tax rates than an individual, particularly if your profit is getting up there somewhat. Often, it’s discussed that you will transfer assets, but again, you may have costs associated with this and it may not be the most effective strategy from an asset protection angle. Every situation is different, so again, talk to your accountant or lawyer.
- You must understand that running a company is different from, say, a Sole Trader. When you operate as a Sole Trader, you often don’t draw ‘wages’ as such and the profit left over is essentially attributed to you. In a company, the money that is invoiced by a company is not your money, that is those funds belong to the company. Too often, directors take money out of the company, not as a dividend or wage, but as ‘drawings’ and don’t understand the legal and tax ramifications. Yes, again, talk to your accountant!
- Also discuss with your accountant the timing. Whilst they frequently don’t like a changeover 1st July (their busy time) this is often the ideal time for a clean break. However, if your income is already high as a Sole Trader, it might be strategic to action that change sooner, perhaps 1st of a BAS quarter, say 1st January or 1st of April, rather than waiting for 1st July to roll around. As I said before, every business and every situation is different.
- If you do proceed with becoming a company, then you have many things to do. Some of the critical things are setting up the company, registering for an ABN, GST registration etc. But what you should realise is that your bookkeeping data file (let’s say MYOB, Xero or QuickBooks) doesn’t just continue to be used, where you simply add Pty Ltd to the name. It’s far more complicated than this. It’s a new entity, which means new bank accounts, new ABN and yes, new bookkeeping data file and new invoice template.
- Even the money which comes into the new entity needs to be attributed to the correct entity. This is where things can (and do) get messy. Let’s image you start trading out of the new entity 1st Customer ‘A’ pays some June and July invoices together to the new account. Customer ‘B’ also pays some June and July invoices, but to the old entity’s account. Essentially in both scenarios, some money has gone into the wrong entity. You will either need to transfer the funds out of the wrong entity to the correct one, and then receipt in the correct entity, or start actioning ‘inter-entity’ loan accounts, which can get messy if you’re not detail-focussed and very confident with your accounting software. In a perfect world, all customers would pay their June (or older invoices) to the old entity, and invoices raised by the new entity from 1st July in to the new bank account – but as all of you in business know, things don’t always run perfectly, or to plan.
- Remember also that many other factors come into play. If you’re a tradie, builder, accountant etc, then you have licensing in your own individual name, which is fine as a Sole Trader. However, once you become a company you also have to have a license in your company BUT also have to maintain the individual license as well, and yes, pay double fees. It’s important that you get the company license, otherwise essentially, you may be operating without a license if the works are invoiced through the company entity.
- Staff is another area which is impacted. Frequently, whether the sale of a business, or move from one structure to another, usually the leave entitlements are transferred; which means that when you setup payroll in the new entity, in the new bookkeeping file, you’ll need to transfer those entitlements. Payslips will need the new details on them and of course, you’ll need to get into contact with all the other affected areas of payroll, such as superannuation, Work Cover / Workers Compensation, any agencies you deduct funds on behalf of (ie Child Support).
- Finally, think about all your documentation and even your marketing. Does the new name, or more likely your new registration number, need to go onto your marketing? What about quotes or your business card? Be sure also to update your website with license number, ABN although it’s highly unlikely you’ll have major changes, as your domain is likely specific to your business name.
As you can see, switching entities isn’t just a simple change of name, or “just add Pty Ltd” to the end of your invoices. Far more is involved and ongoing, you’ll also have additional responsibilities if you’re now a company. Not only the extra licensing you may have, but also ASIC registration which requires at least an annual review and annual fee. Your accountant will have more work to do as well in respect of preparation of tax returns and financials.
I should say also, not quite as complicated, but if you change your business name or logo, but keep your structure the same, you will still need to update your website, update your marketing, branding and often all your social media posts IF you plan to use them again. You really can’t re-use image content which has an old logo or brand name on it. Your social media profiles may well need updating (although check first how many changes you’re allowed in a period, and how to do this correctly). Generally, with a website, you won’t change this IF you’ve got a good ranking on Google, as a domain name change can adversely affect your ranking. In the course of many decades of business coaching, most (but not 100%) of website people suggest that you don’t change your domain if you’re very established and/or have a high SEO ranking. You could lose your place in that ranking by a little, or a lot.
So, as you can see, changing your business structure (aka accounting entity) does come with it quite a few things to be actioned. Don’t let this scare you off if the change is a good thing for your situation, but do be informed and work through what needs to happen. Likewise, as well, don’t expect this will all be done overnight; official bodies take time to process things, agencies like the ATO take time and even your bank will need information to set up things in the right way, as they also have obligations in respect of identification and ensuring anti-money laundering laws are complied with.
If you are a business coaching client of mine, and would like the 34 point checklist that I have, just reach out to me directly at donna@donna-stone.com.au and I’d be happy to email this to you. My passion is your potential.
Read 12 Ways to Have Fun in Your Business.
