Common Mistakes When Restructuring Your Business

A business structure that suited you at the start can quietly hold back your growth and leave your home exposed. A structure review is a chance to fix that, as long as the restructure is planned in the right order.

This article covers the mistakes we see most often when owners change their entity structure, and how to avoid them.

When Should You Restructure Your Business?

You should restructure when your risk, income or ownership has outgrown your current setup. The clearest warning sign is a sole trader structure that carries real business risk. Sole traders have unlimited personal liability, meaning personal assets could be used to cover business debts.

Other triggers include hiring staff, signing larger contracts, taking on a partner or wanting to invest profits outside the business. A business health check is a practical way to find out whether any of these apply to you before you spend money on legal and accounting work.

The common mistake is waiting for a dispute or a debt before acting. Transferring assets after a claim arises, or when insolvent, can be challenged or set aside by creditors or a liquidator or trustee, so review your structure before any dispute.

Sole Trader to Company: What Changes and What Doesn't

Moving from sole trader to company can separate business liabilities from your personal assets, but it does not remove every risk. The company enters into contracts, owns the business assets and takes on business liabilities, which can help protect the personal assets of its owners.

Consider an electrical contractor who has operated as a sole trader for years. The business now has three employees and larger commercial jobs, and the owner's family home is in their own name. A single large claim could reach that home.

The contractor sets up a Pty Ltd company, registers it with ASIC and moves the vehicles, tools and contracts across. The company becomes the employer and the contracting party. The outcome is that, once contracts are novated and operations have moved, new business debts will generally sit with the company. Existing personal debts stay with the owner. Personal guarantees and certain director liabilities can still reach the owner's personal assets.

There are trade-offs. Where companies obtain loans, it is not unusual for directors to be required to provide personal guarantees. A guarantee puts the home back on the line for that debt. A company also brings higher upfront and ongoing costs, including ASIC fees, accounting, registers and governance. Our company structure team can help you weigh these before you commit.

Small Business Restructure Rollover: Moving Assets Without Immediate Income Tax

The small business restructure rollover can let eligible businesses transfer active assets to a new entity without an income tax liability at the time of transfer. The ATO says it allows small businesses to transfer active assets from one entity to another without incurring an income tax liability.

The conditions matter. The entity must have an aggregated turnover of less than $10 million. The transfer must be part of a genuine restructure of an ongoing business, not an artificial or tax-driven scheme. The ultimate owners must also be the same individuals as before the restructure.

The most common mistake is moving assets without checking they qualify. The rollover is not available for other business assets, such as loans to shareholders of a company. It also covers income tax only, so contracts, licences and lender consent still need separate attention.

The ATO has a safe harbour for the genuine restructure test. Under it, the restructure is accepted as genuine if conditions are met for three years after the transfer. A sale of the business inside that window forfeits the safe harbour and reopens the question. If you plan to sell within a few years, raise that with your accountant before restructuring. Our tax services team can check eligibility and make sure the election is made correctly. Tax outcomes depend on your circumstances, so get advice from your accountant before you transfer anything.

Company Tax Rate: Will You Pay 25% or 30%?

A company pays 25% tax if it is a base rate entity and 30% if it is not. A base rate entity has aggregated turnover under $50 million and no more than 80% of assessable income from passive sources.

This catches owners who use the operating company as a holding place for investments. Passive income includes interest, dividends, rent and royalties. If passive income is more than 80% of assessable income, the 30% rate applies regardless of turnover. For most active trading companies this is not an issue, but a company that builds a large investment portfolio inside the same entity can lose the lower rate.

There is a further trade-off. A company does not receive the CGT discount on assets held for more than 12 months, so the full gain is taxed at the company rate. That matters if you plan to hold property or other growth assets. Investments often sit better in a separate entity, and our wealth creation and passive income service looks at where they should live. Confirm the specifics with your accountant.

Mistakes That Happen After the Paperwork Is Done

The most frequent post-restructure mistakes are signing personal guarantees without thinking, mixing personal and business money, and leaving ownership rules unwritten.

A company is a separate legal person, so it needs its own bank account, its own contracts and its own records. Directors do have some personal liability in certain situations, such as for unpaid superannuation or taxes withheld from employees. Protection also depends on directors meeting their duties.

If there is more than one owner, a shareholder agreement should set out how decisions are made, how shares are valued and what happens if someone leaves. Writing it when everyone gets along is far less costly than negotiating it during a dispute.

Finally, review your insurance, licences and supplier terms after the move. They often sit in the old entity's name and are easy to forget.

Plan the Restructure Before You Move a Single Asset

The right order is to review your goals, model the tax and liability outcomes, and only then set up entities and transfer assets. Owners who skip the modelling step often find the new structure solves one problem and creates another.

Segue Advisory Group works with business owners across Australia to plan restructures that support growth as well as protection. Call one of our team or book an appointment at a time that works for you, and we will map out a structure that fits where your business is heading.

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