Restructuring Your Partnership into a Company, the Step-by-Step Process

There comes a point in the life of many partnerships when the structure itself becomes the problem. The business has grown past what the partners can fund from personal resources, a bank wants to lend against an entity rather than against individuals, a major client asks to contract with a limited company, or one partner wants a way to bring in capital without carrying unlimited personal liability for the business's debts. When that happens, the partners often decide to restructure the partnership into a proprietary company limited by shares.

When the process is complete, you will have a registered company with its own Australian Company Number (ACN) holding the business's assets and contracts, the employees and the business name sitting under the company, and the partnership formally dissolved. It is worth knowing now what does not happen by itself. Contracts with clients and suppliers do not automatically transfer to the new company. The business name is not transferred to the company either: it is registered to the company afresh, and the partnership's registration is cancelled. And the partnership does not dissolve just because a company now exists. Each of those outcomes requires its own deliberate step, and this article walks through the process in the order it has to happen.

Before you start: the prerequisites

Before anything is lodged with ASIC, six pieces of groundwork need to be in place:

• The partnership agreement: your first document. It records what the partners have already agreed about restructuring, whether unanimous consent is required, and how profits, losses and capital are dealt with on a transfer. If there is no written agreement, the partnership legislation of your state or territory fills the gaps.
• A decision by all partners: in practice every partner has to agree to the restructure. One partner holding out, or asking to be paid out in cash rather than shares, can change the shape of the whole transaction and, as discussed below, the tax outcome.
• A company name that is available: check that the name you want is not already registered or too similar to an existing name before you commit. You can reserve a name with ASIC for a small fee while the rest of the planning is completed.
• Decisions on directors, shareholding and the constitution: who will direct the company, how the shares will be split between the partners, and whether the company will adopt a standard constitution or a bespoke one. A shareholders' agreement is worth considering when the partners are taking shares in different proportions or with different expectations.
• Tax advice on the restructure: the transfer of the partnership business is a disposal of assets for capital gains tax (CGT) purposes, and the partners need to know their exposure and whether rollover relief is available before anything is signed. This is the prerequisite most likely to be underestimated.
• A valuation of the assets and liabilities: you cannot transfer what you have not identified and valued, and the valuation drives both the price in the asset sale agreement and the CGT calculation.

Two prerequisites trip people up more than any others. The first is third-party consent: leases, franchise agreements, finance facilities and many supply contracts cannot be assigned without the other party's agreement, and that consent is often slow to obtain. The second is tax advice: it has to come before the documents are signed, because the structure of the deal is what determines whether rollover relief is available.

The transition, step by step

The order below is the order the external system imposes. The company has to exist before it can hold assets, employ staff or hold registrations, so incorporation comes first.

Step 1: Register the company with ASIC

The company is registered by lodging an application under s 117 of the Corporations Act 2001 (Cth) with the Australian Securities and Investments Commission (ASIC). The application is made online through ASIC Connect, and the standard fee for registering a proprietary company with share capital is $611, with ASIC indexing its fees each year on 1 July. The application needs:

• the proposed company name, or a statement that the company will use its ACN as its name;
• the address of the proposed registered office;
• the proposed directors and their consent to act;
• the proposed shareholders and the share structure; and
• the company's constitution, if it has one.

When ASIC registers the company it issues the ACN and a certificate of registration under s 118, and the company comes into existence as a body corporate at the beginning of that day under s 119 of the Corporations Act 2001 (Cth). Keep the certificate: banks, landlords and counterparties will ask for it.

Step 2: Apply for the company's ABN and tax registrations

The new company is a separate entity from the partnership, so it needs its own registrations. Apply for an Australian Business Number (ABN) through the Australian Business Register once the ACN is in hand, and the ATO will issue a tax file number for the company. If the business has, or is likely to have, an annual GST turnover of $75,000 or more, the company must register for GST, and it has 21 days to do so once the threshold is reached. If it employs staff, it will also need to register for PAYG withholding. None of these registrations carries over from the partnership; each is taken out in the company's own name.

Step 3: Transfer the assets, contracts and liabilities to the company

This is the legal heart of the restructure. In substance the partners are selling the business from the partnership to the company, and the sale needs to be documented even though the same people end up owning both sides. An asset sale agreement should record:

• the assets being transferred, set out in a schedule, including goodwill, plant, stock, intellectual property and work in progress;
• the price and how it is satisfied, which in the usual restructure is by the issue of shares to the partners;
• which liabilities the company assumes; and
• the warranties the partners give about the business.

Intellectual property must be assigned in writing. Leases, equipment finance, franchise agreements and key supply contracts usually have to be novated, which means the other party must consent to the company stepping into the partnership's place. Real property transfers can attract transfer duty in some states, so the stamp duty position should be checked before settlement. Bank accounts need to be opened in the company's name and the partnership accounts closed once the balances are moved, and insurance policies need to be rewritten with the company as the insured.

Step 4: Move employees across under the transfer-of-business rules

Employees do not transfer automatically, but the law gives the move a framework. The Fair Work Act 2009 (Cth) defines a transfer of business under s 311: the employees' employment with the partnership, as the old employer, ends; they become employed by the company within three months; the work they do is the same or substantially the same; and there is a connection between the old and new employers, such as the transfer of the business's assets between them. Where the transfer-of-business rules in Part 2-8 of the Act apply, the employees' service and entitlements can carry across to the company, and an enterprise agreement that covered the work can follow the transferring employees. In practice the company makes offers of employment to the staff, sets the start dates within the three-month window, and updates employment contracts, superannuation and payroll arrangements. The detail matters here, and employment advice, or the guidance published by the Fair Work Ombudsman, is worth checking before the offers go out.

Step 5: Re-register the business name in the company's name

A business name is registered to a specific entity under the Business Names Registration Act 2011 (Cth), and it cannot simply be handed from the partnership to the company. The company needs to apply to register the name in its own right, and the partnership's registration is cancelled once the partnership stops carrying on business under that name. The same applies to other registrations that sit on the partnership: licences and permits, GST and PAYG registrations, and industry accreditations. Update the ABN details, marketing materials, stationery, website and signage so the business presents consistently under the company.

Step 6: Wind up and dissolve the partnership

Once the business has moved across, the partnership's affairs have to be finished properly. Prepare final accounts for the partnership up to the date of transfer, collect outstanding debts, pay the partnership's creditors and lodge the final partnership tax return. Then dissolve the partnership in the way the partnership agreement specifies, or, if there is no agreement, under the partnership legislation that applies in your state or territory. The partners should record the resolution agreeing to the dissolution and the dissolution date, close the partnership's bank accounts, and notify ASIC so the partnership's business name registration can be cancelled.

Where the process trips people up

The restructure tends to stall in the same four places, and each is worth addressing before the company is registered:

• Consent for contracts: the most common hold-up. Counterparties are under no obligation to agree to a novation, and discovering that a key contract cannot move across until the week before settlement can delay the whole restructure. Identify every contract that needs consent during the planning phase and start those conversations early.
• The CGT rollover conditions: the rollover under Subdivision 122-B of the Income Tax Assessment Act 1997 (Cth) defers the CGT on a transfer of partnership assets to a company, but only where the partners transfer the business assets to a company in which they own all the shares and the other conditions of the Subdivision are met. A partner taking cash instead of shares, or an asset being kept out of the transfer, can put the rollover at risk for everyone. The tax advice needs to be settled before the documents are signed.
• Employee timing: if the new employment does not start within three months of the old employment ending, the transfer-of-business rules in the Fair Work Act 2009 (Cth) may not apply, and service-based entitlements can be lost. Coordinate the termination and re-employment dates deliberately.
• Registration gaps: the company needs its own ABN, tax file number and business name registration. Businesses sometimes keep trading under the partnership's ABN after incorporation, which creates a mess for GST, payroll and invoicing that is expensive to unwind.

Where professional help is required

Most partnerships get legal and tax input before they start, and there are clear points in the process where it is difficult to proceed sensibly without it. A lawyer will review the partnership agreement for consent and restriction clauses, draft the asset sale agreement and the novations, prepare the company constitution and any shareholders' agreement, and advise on the employee transfer steps. A tax adviser will work out the CGT position, confirm whether the Subdivision 122-B rollover is available and should be chosen, and handle the final partnership return and the new company's registrations. The lawyer and the accountant need to see the same deal structure, because the documents and the tax outcomes are two sides of the one transaction. This is also the point at which a commercial lawyer can flag issues the partners have not thought of, such as a partnership clause that restricts restructuring, a lease that prohibits assignment, or an employee entitlement that will not survive the transfer.

Get the consents and the tax position sorted first

If there is one thing that determines whether the restructure succeeds, it is the preparation that happens before ASIC is ever approached. Registering the company is the easy part: the fee is modest and the application is online. The steps that take the longest and fail most often are the ones that depend on other people, the counterparties whose consent is needed to move contracts, the employees whose terms have to be managed, and the tax conditions that have to be met at the moment of transfer. If the tax advice is settled and the consents are lined up before the company is registered, the rest of the process is largely administrative. If they are left until after, the restructure stalls while the business is caught between two structures.

The key points to take away are these: the partners must agree before anything is lodged; the company is registered with ASIC first, then takes its own ABN, tax file number and GST registrations; the assets, contracts, employees and business name each move across through their own documented step; and the partnership is wound up and dissolved only after the business has fully transferred. Work through the process in that order, with legal and tax advice before the documents are signed, and the move from partnership to company can be completed without the business missing a beat.