You might have started out as a sole trader and are now looking to become a partnership, or you might want to restructure as a company to meet financial goals or enable expansion overseas. Whatever the reason, there are pros and cons to consider, and tax and compliance requirements to keep in mind.
We spoke with a business adviser for their tips on when and how to change structure effectively, and with a business owner about what they’ve learned shifting from a one-person start-up to a global company.

An expert’s perspective on changing business structure

Michelle Maynard of the tax and business advisory Carbon Group says there are clear benefits to changing from a sole trader structure to a company structure, particularly for asset protection, tax effectiveness and succession planning. However, she explains, it may still not be the best option for certain low-revenue businesses.

What are the benefits of changing business structure?

MICHELLE MAYNARD: There are many reasons a small business owner would look at changing structure. But because every business is different, there isn’t a one size fits all approach.

If you are in a higher-risk industry, you would want to move away from a sole trader to protect your personal assets. As a sole trader, all your personal assets are on the line should anything happen, so you might want to look at becoming a company. As a separate legal entity, a company can sue and be sued so it offers the most protection to small business owners.

As a sole trader you pay individual tax at rates which range from 19 per cent to 47 per cent depending on how much you earn. A company pays tax at a flat rate of 25 per cent. The more income you earn, the higher tax rate you pay as a sole trader. So you might look at changing structure to be more tax effective. You will pay tax at individual rates for any money you take from the company, but as a company you will have more tax planning opportunities than as a sole trader.

How can it enable growth opportunities?

MICHELLE: Another reason you might look at moving to an alternative structure is succession planning. As a sole trader, the options for succession planning only involve winding the business up when you are done, or selling it. There is little continuity. With a company structure, however, you can bring on other investors or become an investor yourself while stepping away from day-to-day operations. You have more options.

When should a change in structure be avoided?

MICHELLE: For those with low-risk, low-profit businesses, the setup and compliance costs may make a different structure untenable. The point where you start paying more than 25 per cent tax rate as an individual is approximately $125,000. So profit below that, unless you had substantial assets you wanted to protect, probably wouldn’t make it worthwhile once you account for increased setup and compliance costs.

What are the compliance requirements of a change in business structure?

MICHELLE: A new entity needs to be treated completely separately and does take a bit of admin work. New accounts, new accounting software, new leases, new insurance – everything needs to be changed.

There are also strict rules for how you get money out of companies – it has to be declared as a salary or wage, or as dividends. Unlike a sole trader where you are entitled to take the funds, you now need to realise the money effectively belongs to someone else – the new entity. There are ways to get the money out, such as declaring wages or dividends, but be aware of the reporting and compliance work that needs to be done around this.

Companies and trusts will also have higher compliance costs than a sole trader tax return, so put that in your budget.

What else should sole traders and business owners consider?

MICHELLE: Make sure you get advice before you make changes to ensure a change in structure is right for you, you are set up in the correct structure for your situation, and you are fully aware of your new obligations and how to operate in a new structure.

From small business to global company

Tom Lawrence is the founder of custom sock company Swanky Socks. The business has grown from a one-person start-up into a global business that recently onboarded its first UK-based employee.

Why did you decide to change the business structure?

TOM LAWRENCE: We started with an initial focus on retail only, targeting brick-and-mortar stores and online. We pivoted over several years, starting with manufacturing and ultimately moving into B2B custom merchandising and custom manufacturing in the corporate market.

Restructuring became necessary due to a desire to scale. This was an organic transition for us, however, as it allowed us to build our brand quicker and develop into new markets to drive growth and avoid relying on a single industry.

How did changing business structure enable growth?

TOM: Manufacturing and custom merchandising in the corporate market allows for larger bulk orders in collaboration with our retail brand. Through this we have grown into overseas markets, which has now allowed us to launch our UK office and grow into the northern hemisphere far quicker than managing the business from a single hub in Sydney.

What’s your advice for sole traders or small businesses considering a change in business structure?

TOM: Be smart and take your time. Don’t over complicate what you do. Ensure you have the team to support you to enable your focus on growth. Focus on replicating what works for you in your current market.

We knew it was the right time for us to open overseas offices because we had the team behind us and the cash flow on hand to take a risk – and it is always a risk going into new markets.

Any final words?

TOM: Take your time, but if it works in theory, then I say go for it. You’ll never know what is possible and what you can achieve if you don’t take the leap.