Changing from a Partnership to a Company

Your partnership has done its job. The business has grown, the customer base is steady, and you and your partners are thinking about what comes next: limited liability for the owners, a cleaner way to bring in capital, a record of ownership that survives someone retiring, or a structure that makes it easier to sell the business one day. Those are the reasons most small business owners move from a partnership to a proprietary company. What looks like a paperwork exercise is actually two separate processes joined end to end: ending the partnership and starting the company.

When it is done, you will have a company registered on the Australian companies register with an Australian Company Number (ACN), its own ABN and tax file number, its own bank accounts, and the business's assets, contracts and employees moved across to it. What many owners assume is that the company automatically inherits the partnership's ABN, contracts and staff. It does not. Every asset, contract and employee has to be dealt with expressly, and the order in which you do it largely determines how much tax the changeover costs. Here is the path from one structure to the other, in the order the process actually imposes.

Before you start

Work through these prerequisites before you take any step, because each one can stop the conversion cold:

Agreement of every partner: every partner must consent to the dissolution and to the terms on which the business transfers to the company. If one partner holds out, the whole process stalls, so settle this first.
The partnership agreement: you need it in hand, plus a schedule of what the partnership owns, owes, leases and contracts for. If there is no written agreement, the default rules in your state or territory's partnership legislation apply instead.
Decisions about the company: the company type (for most readers, a proprietary company limited by shares), the name, the directors, the shareholders and the share structure. These feed straight into the registration application.
Director identification numbers: every proposed director must apply for a director ID before the company is registered, through the Australian Business Registry Services. Applications take time, so start early.
Financial records and tax advice: up-to-date accounts, valuations of the assets moving across, and advice from your accountant on the income tax and GST consequences of the transfer.
Money for the registration fee: ASIC charges a fee to register a company, set by regulation and indexed each year on 1 July. The fee is payable at lodgement.

Dissolve the partnership

A partnership is not a separate legal entity. It is a relationship between people carrying on a business in common with a view of profit, and it is governed by state or territory legislation such as the Partnerships Act 1892 (NSW). Because it has no separate existence, there is no register to strike it off. The partnership ends by agreement or by notice, on the date the partners choose.

If you have a written partnership agreement, it usually sets out how the partnership can be ended, how assets are valued on dissolution and how a departing partner is paid out. Start there. If there is no agreement, the legislation supplies the default rules. Under s 32 of the Partnerships Act 1892 (NSW), a partnership entered into for a fixed term dissolves when the term expires, a partnership for a single venture dissolves when the venture ends, and a partnership for an undefined time, known as a partnership at will, dissolves when any partner gives notice of an intention to dissolve. A partner can also retire from a partnership at will by giving notice under s 26 of the same Act.

In practice, this means:

Set the dissolution date and record it: the date drives the final accounts, the final tax return and the point at which the partnership stops carrying on the business.
Get every partner to sign a dissolution agreement: it should record the dissolution date, how assets and liabilities are divided or transferred, and any indemnities between the partners. This document is the foundation for everything that follows.
Do not proceed over a partner's objection: the legislation does allow a court to dissolve a partnership in some circumstances, such as where a partner is permanently incapable of performing their role or the business can only be carried on at a loss, but that is a dispute, not a restructuring step. If the partners cannot agree on the conversion, resolve that before incorporating.

Wind up the partnership's affairs

Before the business can move anywhere, the partnership's own affairs have to be brought to a close:

Final accounts: collect the partnership's debts, pay its creditors and deal with partner loan accounts. Decide whether loans from partners are repaid, converted into shares in the new company or left as a loan from the partners to the company.
Final BAS and tax return: lodge the final activity statements and a final partnership tax return once the partnership's last income year closes. Each partner reports their share of the final year's income or loss in their individual return. Your accountant should confirm the treatment, because the final year is where mistakes surface later.
Cancel the ABN: once the partnership stops carrying on the business, cancel its ABN with the Australian Business Register. The ABN cannot be transferred to the company; the company applies for its own.
Close bank accounts: close the partnership's bank accounts and any accounts held in the partnership's name, and open new accounts for the company.

Plan the transfer of assets and employees

This is the stage where the conversion is usually won or lost, because it decides how much tax the changeover attracts. Sort out the treatment of contracts, assets and employees before you register the company, not after.

Contracts

The company does not inherit the partnership's contracts. Each ongoing contract, including leases, supplier agreements, customer agreements, insurance policies and financing arrangements, needs to be assigned or novated to the company with the counterparty's consent. Check every contract for assignment and change-of-control clauses. Some contracts, particularly leases and major supply agreements, will require the landlord or supplier to sign a new document, which can take weeks, so start the consent process early.

Capital gains tax

Moving assets from the partnership to the company can trigger a capital gains tax (CGT) event. The small business restructure roll-over in Subdivision 328-F of the Income Tax Assessment Act 1997 (Cth) lets a small business transfer active assets to a new entity without an immediate income tax liability. It applies where the entity has an aggregated turnover of less than $10 million, the assets are active assets of the business, the transfer is a genuine restructure of an ongoing business, and the ultimate economic ownership of the assets does not change. That last condition is the one that trips people up: if three equal partners transfer the business to a company but end up holding unequal shareholdings, the roll-over does not apply and the transfer is taxed as a disposal.

GST

If the partnership is registered for GST and transfers the business as a going concern, the supply can be GST-free under s 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth), provided the company is registered or required to be registered for GST and both parties agree in writing that the supply is of a going concern. Without that written agreement, GST is charged on the transfer. Stamp duty is a separate, state-based question: some states exempt or reduce duty on genuine corporate restructures, and your lawyer should confirm the position before the transfer documents are signed.

Employees

Under the Fair Work Act 2009 (Cth), when a business transfers to a new employer the new employer generally must recognise an employee's service with the old employer for most entitlements, including sick and carer's leave, parental leave and requests for flexible working arrangements, and accumulated annual leave carries across. The transfer ends the employee's employment with the old employer, so the partnership must give notice of termination or payment instead of notice. A new employer that is not an associated entity can choose not to recognise service for redundancy pay, in which case the old employer pays redundancy. These rules are not optional, and they need to be worked through before the transfer date, not on it.

Register the company with ASIC

The company comes into existence only when ASIC registers it. Under s 117 of the Corporations Act 2001 (Cth), a person lodges an application with ASIC stating:

the type of company to be registered;
the proposed name, unless the ACN is to be used in the name;
the name and address of each person who consents to become a member;
the given names, former names, date and place of birth of each person who consents to become a director or secretary;
the address of the proposed registered office and the principal place of business;
the share structure, being the number and class of shares each member agrees to take up and the amount each agrees to pay.

Practical points for this step:

Register online through the Business Registration Service (BRS): this is the default path. ASIC processes the application and sends a confirmation email with the ACN and a certificate of registration. The corporate key, needed to access the company's records through the ASIC officeholder portal, is sent to the registered office.
Directors need their director IDs first: the application cannot include a director who does not already hold a director ID.
Choose the name before you lodge: if you do not choose a name, the company's name is simply its ACN followed by "Pty Ltd". If you want a particular name but are not ready to register, you can reserve it for up to two months by lodging Form 410.
Paper is the exception: lodgement is on Form 201 where the online service cannot be used, for example where an officeholder wants their residential address hidden from the public register.
The fee is indexed: the registration fee is set by regulation and is adjusted each year on 1 July, so confirm the current amount with ASIC before you lodge.

Under s 118 of the Corporations Act 2001 (Cth), ASIC gives the company an ACN, registers it and issues a certificate of registration. Under s 119, the company comes into existence as a body corporate at the beginning of the day on which it is registered. From that moment the company, not the partners, is the legal owner of whatever has been transferred to it.

Get the company's ABN, TFN and tax registrations

Once the company exists, it needs its own tax identity:

ABN: apply through the Australian Business Register. The application requires the company's ACN.
Tax file number: apply to the ATO for a TFN for the company. The partnership's TFN cannot be reused.
GST: the company must register for GST once its GST turnover is $75,000 or more, and must do so within 21 days of the requirement arising. If the business already turns over more than that, registration should happen at the same time as the ABN application.
PAYG withholding: if the company employs staff, register for PAYG withholding so it can withhold tax from wages.

The company also needs to be set up with the same practical things the partnership had: workers compensation insurance, payroll software and the records a company must keep, including a share register and financial records.

Move the business across

With the company registered and its tax identity in place, the transfer itself can be completed:

Execute the transfer documents: do so by a formal business sale agreement or a schedule to the dissolution agreement, and make sure the roll-over choice is documented for the tax file.
Novate or assign the contracts: work through the contracts you identified earlier and chase the counterparty consents.
Transfer the employees: document the transfer in writing, recording the transfer date, the recognition of prior service and the continuity of their entitlements.
Update the bank accounts, insurance policies and licences: move them into the company's name, and register a business name if you want to trade under a name different from the company name.
Notify customers, suppliers and the ATO: tell them about the new entity, and start using the company name and ACN on invoices, letterheads and other documents, which the Corporations Act 2001 (Cth) requires.

Where the process usually stalls

These are the points where the conversion most often stalls:

A holdout partner: dissolution by agreement needs everyone. If one partner will not sign, the business cannot be folded into a company without resolving that first, whether by negotiation or by buying the partner out.
Roll-over conditions missed: the small business restructure roll-over only applies if ultimate economic ownership is unchanged and the business genuinely restructures. A share split that changes who owns what turns the transfer into a taxable disposal.
Contracts assumed to move automatically: leases and supply agreements usually need the counterparty's written consent. The consent process is slow, so it should start before the company is registered, not after.
Director IDs not arranged: a director cannot be included in the application without a director ID, and the application process itself takes time.
The old ABN left live: the partnership ABN stays on the register until cancelled, and the company cannot use it. Cancelling it is part of winding up, not an afterthought.

Where a lawyer and an accountant fit in

A lawyer handles the documents that make the conversion legal and binding. That includes drafting the dissolution agreement and partner consents, advising on whether the company should adopt a constitution or rely on the replaceable rules in the Corporations Act 2001 (Cth), structuring the shareholding, preparing the novation and assignment documents for contracts and leases, preparing the employee transfer documentation and checking award coverage, and advising on whether the restructure roll-over applies and on stamp duty in your state.

An accountant handles the numbers: valuing the business and its assets, preparing the final partnership returns and activity statements, calculating any CGT consequences, documenting the roll-over choice, and setting up the company's ABN, TFN, GST and payroll registrations.

The two advisors need to work in that order. The tax treatment of the transfer is decided by how the documents are drafted, so the accountant's modelling should inform the lawyer's drafting, and both should happen before the company is registered.

The tax treatment of the transfer sets the sequence

The single thing most likely to determine whether the conversion succeeds is settling the income tax and GST treatment of the asset transfer before the company exists. The restructure roll-over, the going concern exemption and the state stamp duty position all have conditions that must be met at the moment of transfer, and none of them can be backdated after the event. Once the company is registered and assets move across, a CGT event has happened and the ATO's position is fixed by what the documents say. Get the accountant and lawyer to model the transfer, agree the structure and draft the documents first, then dissolve the partnership, register the company and move the assets in that order.

The process in short: agree the dissolution with every partner and record the date, wind up the partnership's accounts and cancel its ABN, plan how contracts, assets and employees transfer and what tax that attracts, register the company with ASIC under s 117 of the Corporations Act 2001 (Cth), obtain the company's ABN, TFN and tax registrations, and then complete the transfer. Each step depends on the one before it, and the ones that cost the most, the tax treatment of the transfer and the consent of every partner, are the ones to settle first.