Transferring sole trader ownership vs starting a partnership

Changing your sole trader business
Transferring ownership vs. starting a partnership

One of the things that makes the Australian economy so dynamic is our flourishing small business community. From artisan doughnut makers to teenagers making masks, our towns thrive on local products. That's because there's tremendous government support and resources for new businesses—it's easy to set up a small shop and start trading, learning the nuances as you go.

Many of these businesses feel encouraged to start off as a single-owner venture, but eventually the time will come to expand. And when you're expanding, you have a few options, such as teaming up with a partner or even handing the reins over to someone else altogether. In this blog, we want to talk about making that big change. We'll walk you through:

Changing the ownership of your sole trading business

In this case, you're removing yourself from the business and handing it over to someone else, like a family member or other interested party. 

Transitioning from a sole trader to a partnership business

In this case, you're either:

• Dissolving your sole trader business and starting a new partnership with other people.
• Dissolving your sole trader business and joining an existing partnership as a new member.

In both situations, you have some similar processes to follow. That said, business changes like this don't happen in a single day. Here's how to go about it:

Step one: Close your sole trader business

Pay outstanding bills and lodge final taxes

As a sole trader, you may have operated in a building or on property you owned. Before you initiate any paperwork to change your business, you'll need to pay off all bills that you incurred as a sole trader. This includes payments for electricity, water, asset maintenance, and any end-of-lease cleaning jobs.

Changing your sole proprietorship means closing the business. And so you also have to lodge your taxes and cancel your GST registration, and do so within 21 days of closing your sole trader business. Cancelling GST will also automatically cancel some of your other business registrations. Have a look at this guide from the Australian Tax Office about cancelling your registration.

Inform stakeholders, staff, and government bodies

If you hired employees, you need to inform them about the change. This also applies to any other individuals who may have worked with you such as your tax consultants, legal advisors, and auditors.

You also need to update the Australian Taxation Office (ATO), Australian Securities & Investments Commission (ASIC), and the Australian Business Register (ABR) of your business name, contact information, partner details, ABN, and new business structure within 28 days.

Step 2: Transfer paperwork and assets to the right party

This includes:

1. Paperwork such as any leases you have on property used for business purposes, bank loans you acquired, operating licenses, and other documentation like legal, employee, and financial records.

2. Online purchases you've made on behalf of your business like website domains, hosting providers, trademarks on your name and logo, and all software and hardware you commissioned for business use.

If you're changing ownership—

Since a sole trader business is deeply tied to the owner, when you change ownership, you transfer all material to the new owner.

If you're transitioning to a partnership—

The business lives as a separate legal entity, and so you transfer all paperwork and assets to the business name.

Transfers can take as long as 12 months, and you remain liable until the transfers have gone through completely.

Step 3: Cancel your ABN and legal business name

When you change your business, you have to cancel your ABN on the Australian Business Register. When you do so, you'll lose credentials to the government websites where you previously managed your business affairs. Before you cancel your ABN, make sure:

• You've lodged your business activity statements leading up to the end of your trading

• You pay any remaining taxes, including GST

If you're changing ownership—

The new owner should operate under a separate ABN.

You can transfer your existing business name to whoever is taking over the business from you. Or you can also cancel it so that they can register a new one. Here's our complete guide on how to go about registering a new business name.

If you're transitioning to a partnership—

After you've cancelled your ABN, you can apply for a new ABN as a partnership business. This will also give you new credentials to manage your business online.

When you add partners to an existing partnership, you're reconstituting a partnership and don't need to apply for a new ABN. Read more about this on the Australian Taxation Office's website.

Final step (partnership only)

You'll need to sign a partnership agreement with all partners involved. This agreement should outline the details of your business operations, including profit and loss sharing and liabilities.

Similarly, if you join an existing partnership business, you, along with existing partners, should sign a new agreement to specify the change and outline the newly agreed upon business terms.

Wrapping up

That's the essentials of changing your business structure. An inevitable ramification of running a business is that you have to make changes throughout its lifetime. Nevertheless, the legal and operational procedures can be long and arduous—we hope this post has given you some clarity on what to expect.

Learn more: Transitioning from a sole trader business to a company