Switching your business structure from a sole trader to a company can provide numerous benefits. The switch grants you limited liability, safeguarding personal assets and the facilitation of a more accessible capital raising. Learning how changing your business structure can impact your daily operations and find out the steps to make this transition smooth.
Steps to Register Your Company:
- Deciding on the officeholders;
- Understanding your legal obligations as a director and shareholder;
- Setting up your company; and
- Other key characteristics.
Deciding on the officeholders
When establishing a company, it is necessary to determine the individuals who will serve as officeholders and shareholders for the company. To guide you through this process, you must first familiarize yourself with the roles and responsibilities associated with each position.
Shareholders: own ownership stakes in the company.
Directors: oversee the company’s management.
Secretaries: handle the administrative tasks and day-to-day responsibilities of the company.
Following such, the determination of directors must be decided. This can be done by evaluating the company’s size, as with smaller businesses there is typically only one director, whereas larger enterprises often opt for a board of directors. Directors can be decided based on their necessary skills, industry knowledge, and strategic contributions to the company.
When appointing a secretary, it is crucial to assess their proficiency in administrative tasks. This ensures that the selected individual will be able to handle all necessary paperwork and administrative responsibilities related to their position.
You must then determine the distribution of shares among shareholders and consider drafting a shareholders’ agreement outlining the rights and responsibilities.
Once all officeholders are determined, it is imperative to uphold precise records of the company’s officeholders and shareholders. Regular updates to these records are necessary to capture any change and ensure accessibility to all relevant parties.
It is recommended that professional guidance, such as legal and financial counsel, is sought to ensure compliance with all regulations and best practices.
- Understanding your legal obligations as a director and a shareholder.
While managing a company, directors and shareholders are required to personally adhere to obligations stipulated by Australian Law. The following presents a summary of the legal responsibilities that directors must meet to ensure compliance with these regulations.
A director must be prepared and dedicated to the role, to fulfill the significant responsibility it entails. If the position is assumed by someone unsuitable or unprepared for the role, there could be significant exposure to serious liability.
Your Role as a Company Director:
As a director, you must oversee the company’s affairs and comply with the legal obligations under the Corporations Act 2001, even if you appoint an agent. You must stay up to date on the company’s activities, inclusive of its financial position, and must actively partake in meetings with managers.
Avoid using your position for personal gain or causing harm to the company. Ensure that business decisions are made in good faith and align with the company’s best interests. Assess the impact on the business and performance, particularly regarding financial and reputable aspects.
Stay updated on the company’s financial position and seek professional advice when necessary. These duties represent the minimum requirements for directors and officers of small proprietary companies under Australian Law. Failure to comply with these obligations may result in penalties, inclusive of civil and criminal charges.
Management of Assets, Debts, Employees and Investments:
As a company director, it is crucial to recognize that a company’s assets are distinct from personal assets and treating them as such is imperative. The company bears the responsibility of settling debts, encompassing trade creditors, employees, and statutory bodies such as the Australian Taxation Office (ATO). In cases of suspected insolvency, refrain from trading as usual, incurring debt, or conducting regular business. Seek immediate professional advice to prevent insolvent trading.
For information on insolvency for directors see Information sheet 42 (INFO 42) and also refer to Regulatory Guide 217 for information on your duty as a director to prevent insolvent trading.
Moreover, invested funds, whether through loans, owner contributions, or investor shares, must be used solely for legitimate company purposes. Before making dividend payments, ensure the company can settle debts owed to creditors, employees, and authorities. Director’s risk personal liability for breaches, like trading while insolvent or providing personal guarantees. For companies with employees, confirming PAYG withholding or SGC obligations is vital to avoid personal liability under the ATO’s Director Penalty Regime.
Director Responsibilities in the Presence of a Liquidator:
When a liquidator is appointed, the director must provide vital details, including a statement about the company’s business, property, activities, and financial status using Form 507 Report On Company Activities and Property (ROCAP). The director is also required to submit all company records and assist the liquidator upon request. Further guidance on director duties during liquidation is available in Information Sheet 42 Insolvency for Directors (INFO 42).
Shadow Directors:
Shadow directors, though not formally appointed, can be held accountable for duties and liabilities akin to official directors. Assuming a directorial role or giving instructions to appointed directors may classify an individual as a ‘shadow director.’
Importantly, it should be noted that shadow directors can be held responsible for breaches of laws related to directors’ duties.
- Setting Up Your Company
The process of company establishment offers two avenues: Independently done via ASIC or seeking professional assistance through a legal practitioner or accountant. The procedural steps are as follows.
Select a Company Name:
You must choose a company name that is unclaimed by existing entities, conventionally including ‘Pty Ltd’ or ‘Proprietary Limited’.
Identification of Stakeholders:
Deliberate on the composition of shareholders, director(s), and secretaries ensuring their eligibility and explicit consent for the positions.
Specification of Business Location:
There must be a state of incorporation and a defined registered business address, representing the company’s principal place of business, are requisite elements.
Registration with ASIC:
Form 201 must be completed to register the company through ASIC. The registration fee is a one-time payment of $488, with an additional annual fee of $263. Once the company is registered, ASIC will issue an Australian Company Name (ACN) and a certificate of registration.
The data on the ASIC website must be regularly updated to maintain accurate records.
Australian Business Number (ABN):
If a business is being conducted an ABN is required. You can apply for an ACN and ABN using the same form on the Business Registration Service. To obtain an ABN, businesses can apply through the Australian Business Register (ABR) website or seek assistance from the Australian Taxation Office (ATO).
Tax File Number (TFN) if generating income:
A tax file number is essential when generating an income in Australia, as it serves as a unique identifier issued by the Australian Taxation Office (ATO). The tax file number is used to link income-generating activities to an individual or entity’s tax records. In essence, having a TFN ensures compliance with tax obligations and facilitates the smooth functioning of financial processes within the Australian taxation system.
Goods and Services Tax (GST):
You must register for GST when your business or enterprise has a GST turnover of $75,000 or more annually. You can register for GST over the phone on 13 28 66, via online services for business or through your registered tax agent or BAS agent.
Pay As You Go withholding tax (PAYG):
Under PAYG withholding, you need to withhold tax from certain payments made to others. This includes payments:
- To employees, company directors, and officeholders
- To workers under labour-hire agreements
- Under voluntary agreements
- Where an Australian Business Number (ABN) has not been quoted concerning a supply.
You must report any withheld amounts in the PAYG tax withheld section of your business activity statement (BAS) and pay all withheld amounts to the Australian Taxation Office.
- Other Key Characteristics
Transferring the Business Assets
To transfer business assets to a new company, you must follow these steps:
- Transferring your registered trading name;
- Inform IP Australia of any changes in the patent, trademark or design ownership;
- Execute a sale agreement for asset transfer;
- Assign intellectual property through agreements;
- Transfer business name ownership; and
- Update domain registration details.
