If you have big plans for your sole trader business,
you may be thinking about how the structure of it might change in the coming years.
For many sole traders, transitioning to a limited liability company is often the next logical next step.
There is nothing preventing a business converting from a sole trader to a limited liability company
at anytime, nor is there a set point at which converting to a limited company is a necessity.
Often, converting from sole trader to limited
company is simply a matter of personal preference. If you are thinking about changing, ask yourself:
Will I pay less tax and receive a higher take-home pay through a limited liability company?
Will the prestige of a limited company help me to attract more clients and grow my business?
Could I benefit from my personal assets being protected, should my business fail?
Do I want to sell my business at some point in the future?
Do I want to bring in business partners or attract outside investment?
As you can see, the choice of business structure
very much depends on circumstances and the future direction of the business.
The most logical time is when the business grows past the GST threshold. Once the
revenue has grown to over $60,000 per year, the business will need to register for GST.
While not compulsory, this is often the time for a change to take place.
To understand GST and registering for GST, check out this video here.
Converting a business
from Sole Trader to Limited Liability Company is a relatively simple process. Although,
it is important to ensure that the sole trader business full fills all its prior tax obligations.
Once the decision has been made to change the business from sole trader
to limited liability company, it will be prudent to include the following steps:
Registration of the Limited Liability Company. The first step is to register
a limited liability company and issues shares to the various shareholders of that company. It is
likely that the shareholder and director will be the sole trader, and they can do all these roles
on their own. The registration procedure is straightforward and is done entirely
online. You can learn more about the registration
process and selecting and reserving your company name by having a look at this video here.
Notify Inland Revenue: Changing the structure that the business operates means there could be new
tax obligations that did not apply previously. Inland Revenue must be notified within 21 days
of making a change to any business structure so IRD can update their relevant tax records.
Transfer the sole trader business to the company: Depending on the sole trader business, there may
be existing business assets (such as property, machinery, equipment, inventory, etc.) to transfer
your new limited liability company. You may need to arrange to sell the business as a going concern
to your new company. Transferring assets during the change of entity can be a complex matter
for some businesses, so you should speak to an accountant for expert help and advice.
Set up a business bank account in the company name: It is advisable to keep
sole trader business finances separate from the new Limited Liability Company
and the traders personal finances, so operating out of a separate business bank account is ideal.
Business Records: Ensure that all your new business records are kept
separate from sole trader and personal records.
There will need to be a final set of sole trader accounts produced and a final tax return to file.
This can be done at the same time as the first Company tax return is filed. In any case,
a personal tax return will still be filed each year by the owners/shareholders.
It is important that you get the right advice especially when it comes to
tax and financial matters. I strongly suggest you talk to
an accounting professional to help you get it right before making any changes.
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