Starting out in a partnership structure is not uncommon. It is a simple structure to test the waters on running a business. As time passes, and you begin to see significant growth in operations, asset values and capability, it is possible to out-grow a partnership structure and a move to a company is a common consideration.

However, once you’ve established your business, taking the time to assess the effectiveness of the structures you’ve implemented for your business operations should be something you do sit down to think about from time to time.

A “Company” structure is legally considered a unique entity, governed by the Corporations Act alongside and income tax legislation and there are specific compliance issues that are unique to trading in a company structure, with directors of the entity ultimately responsible for the actions and outcomes of the business.

You are correct in noting that business profits accumulated in a company structure are capped at a tax rate of 27.5%, if your turnover is under $50 million. The rate is set to decrease further over the next few years to a flat rate of 25% in future years.

While current tax savings are one consideration in a restructure decision, it’s also important that you factor in broader issues and impacts of making such a significant change to how your business operates and functions. Assessing areas such as succession planning, compliance liabilities, current debt levels and overall cash flow can help to shed light on whether adopting a company structure is the most appropriate business decision.

A common pitfall made by business owners with a company structure is to use the bank account of the company as their own for private and lifestyle expenditure, the tax impact of this approach can outweigh the intended tax savings very quickly.

Despite what seems like a wave of discouragement above, there exist significant advantages in moving into a company structure, understanding this requires a holistic approach to your financial affairs, not just the current partnership in isolation.

If you work through a process with your advisers, you should generally come up with options to consider and then it will be a matter of assessing the “pro’s” and “con’s” of such a decision. It’s important to not underestimate how significant a change to a company structure is for a sole trader or partnership organisation. Additionally, the cost of not converting your business completely, meaning you become non-compliant, can create a myriad of additional problems for you and your business and is likely to cost more than the original conversion.

Whilst the tax rate may look attractive, the suitability of a company structure will require greater consideration. This decision is unique to every business and owner and its vital you take the time to understand the scope and scale of the project, with a financial professional to guide you.

If you would like more information on this topic or have a question please e-mail me at albury@crowehorwath.com.au .

Any information in this article has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material. While reasonable care is taken in the preparation of this information to the extent allowed by legislation, Crowe Horwath (Aust) Pty Ltd ABN 84 006 466 351, accepts no liability whatsoever for reliance on it.