Introduction
This article explains when and how you can change your business structure with as little effort and time as possible. It will be useful reading to any business owner, director or partner.
When you started your business you would have thought about which business structure to adopt. As your business expands it is worthwhile reconsidering your business structure and different structural models allow between for different stages of a business. For example, many businesses start simply as sole traders. The next step might be partnership. From there on in, a company may be a better solution despite the additional formalities required because a company is seen as a legal entity and therefore allows you to limit your personal liability. Simply different models meet different needs – this article explains how you can change your business structure, say from a partnership to a company with as less stress as possible.
Why change business structure?
Minimise your personal risk exposure: a sole trader, for example, faces unlimited liability for any debts the business may run up. Restructuring the business as a limited company will limit liability.
Raise more capital:an investor is likely to want a share in this business in return for their cash investment. This is only possible if you can sell shares, for which you need a company.
Share the responsibilities and risks of ownership:for example, taking on a partner can reduce the burden and provide you with cover when you're sick or away.
Plan for sale or retirement: certain structures are more attractive than others and will therefore sell better.
Reward your employees:employee share ownership plans (such as an EMI share scheme) only work within a business structure that allows you to create and distribute shares - such as a limited company.
React to changes: in your type of business or way of working.
Legal implications of changing your business structure
Of course you must comply with the legal obligations of the new business structure you choose, for example:
Companies House registration
If you are setting up a company, limited partnership or limited liability partnership (LLP), you need to send the relevant documentation to Companies House. If your business is already organised in any of these ways, you must notify Companies House of any proposed changes to its structure and complete the necessary documentation.
If your business becomes a company or an LLP, you have to display your full name outside your place of business and at the registered office. Your registration details also have to be printed on your stationery and on external emails. If you have a website, you will need to include a range of information, including the registration details, VAT number and geographical location.
Tax issues
If you are becoming a sole trader you need to inform HM Revenue & Customs (HMRC) for National Insurance contribution reasons and to receive a self assessment tax return. New partnerships must also notify HMRC. If you cease to trade as a sole trader or partnership, you need also to tell HMRC.
Corporate tax becomes payable on profits if you become a company.
Additionally, assets that are transferred from one legal entity to another may attract Capital Gains Tax and stamp duty.
Assets, debts, contracts and premises
You need to consider whether the existing assets, debts and contracts can be transferred to the new entity. You may have to draw up a business transfer agreement to do this. You can find links to template business transfer agreements at the end of this article.
Do be sure to check the terms of your contracts, including employment contracts and suppliers contracts. They may dictate how you make the transfer, for example, you may need consent from the other parties in the contract.
Notify the right people to ease transfer to a new structure
The transfer will go more smoothly if you tell the relevant people at the right time. By keeping them informed, you are more likely to keep them on your side which can only benefit your business in the long run.
Customers
Again, check the contract terms you have agreed with customers – you may need their consent to transfer contracts to the new business entity. If you don't get their consent, and the contract requires it, this may constitute a breach of contract or give rise to certain rights, such as rights of termination.
Suppliers
Write to service providers to they can invoice you at the new address if applicable.
Banks/finance providers
Talk to your lenders about your planned changes. If you lease, hire, hire purchase, or license assets, for example, company cars, you may be prohibited from transferring these assets without obtaining the consent of the third party. If you change from an unincorporated to a limited liability structure – for example, from a sole trader to a company or limited liability partnership - your bank will probably want you to open a different account, and may require personal guarantees for overdrafts or business loans.
Employees
When buying or selling all or part of a business, employers have certain information and consultation responsibilities.
Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), you must inform and consult with representatives of affected employees.
If you have an I&C agreement in place, you must inform and consult employees or their representatives on - among other things - changes to the workforce. This means that you may have to inform and consult when planning to buy or sell all or part of a business.
Note that you do not have to inform and consult at the same time under both TUPE and your I&C agreement – you can choose instead to "opt out" of the agreement and consult under TUPE only.
Landlord
Review your agreement with your landlord. In England, you can split the legal and beneficial interests in property. By this we mean you can transfer beneficial ownership of the property to the new legal entity. There may however, be implications of changing your lease to take account of the new legal entity.
Additional and practical responsibilities
And don’t forget:
- If you are VAT-registered, you need to change your registration details with HM Revenue & Customs. If you start employing people as a result of the change in the business, you may need to inform and register with the Health & Safety Executive.
- There are other steps you can take to make the process go as smoothly as possible.
- Assign your insurance, licences, trademarks and patents to the new entity and register documents with the appropriate authorities.
- If you are transferring assets from one partnership to a limited liability partnership (LLP), be sure to apply for an exemption for stamp duty.
- You may need to change your bank account to reflect your business' new status. Many sole traders use their personal accounts for business purposes - it may be worthwhile changing this to a small business account.
- If you don't want to transfer titles or contracts or assets, you need to keep the previous legal business in existence.
Our advice – be sure to be very logical about how you do this. Write a plan listing all the required tasks and a time frame for each. We suggest you use a business transfer agreement. If everything is recorded and signed as a legal document, you ultimately protect your and your business’ interests. | 
