It is common to see small businesses initially operate under a person’s name that is running the business and then transition into a company structure, where the individual becomes the director or shareholder. There are a number of reasons for this transition. One of the major reasons an individual may transition into a company structure is to limit their personal liability.
Issues to beware of
A commonly used method of transitioning into a company structure is by purchasing a shelf company. A shelf company is a company which has already been legally formed, however it is not active and can be acquired by individuals wanting to start a company quickly. The purchase of a shelf company will usually involve changes to registration with the ATO such as BAS and tax file number and group tax registrations.
However, the failure to transfer elements of the previous company structure to the new company can cause liability issues for the owner of the previous business, especially in the event that a liquidator is appointed. Examples of what should be carried out in order to reduce the risk of liability issues include notifying the banks to ensure that company transactions do not continue through the individual’s personal bank account, notifying the landlord and reassigning the lease to the company and letting the employees know of the change in business structure.
A crucial element which is often missed, is notifying suppliers of the change in business structure. The most ideal approach would involve paying out and closing all personal accounts, opening new accounts, credit applications and finance arrangements in the company’s name. If this step is not carried out properly, and creditors continue to supply the individual with no knowledge of the new company structure, there is a high possibility that the individual may still be personally liable for the debts that remain unpaid, especially in the case of a liquidator being appointed to the company.
If you need advice from an accountant or lawyer to ensure that all necessary elements of a transitioning business is transferred from the individual to the company, the team of accountants and lawyers at The Quinn Group can help. Contact us on 02 9223 9166 or fill out an online enquiry.