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Choosing a business structure is a tough decision for anyone looking to start a business. This is because all business structures come with their own set of advantages and disadvantages. The type of industry you are in will also help determine how you should structure your business. However, it is common for businesses to change their business structure during the life of their business. Common causes include when the business grows to a certain level, or owners decide that a different business structure is more advantageous. This article will explain how you can change your business structure from a partnership to a company.

What Is a Partnership?

A partnership is a type of business structure in which two or more people own a business. It is a typical business structure for small businesses and industries such as law and accounting. A partnership agreement is a legally binding contract that usually governs a partnership. Likewise, many businesses start as a partnership before becoming a company. 

What Is a Company?

A company is another type of business structure that allows a business to be a separate entity from the people that own it. To start a company, you must register it on the companies register. A company structure is popular because it means that business owners have limited liability. Accordingly, business owners are not responsible for business debts. Likewise, creditors do not need to sell their personal assets to pay off business debts. 

It is also easier to sell your business if you structure it as a company, as it is a separate legal entity. You are also able to take the business public if you get to a certain size. However, as a company, you are bound by all company laws.

Changing From Partnership to Company

Tax Obligations

Before bringing your partnership to an end, ensure that you are on top of all of your tax obligations. This means that you must pay any outstanding tax. You should also acquaint yourself with the tax obligations of a company. For example, a company has to pay tax on any profit they make at 28%.

Dissolve the Partnership

The first step you need to take to change your business structure from a partnership to a company is to dissolve your partnership. Dissolving a partnership means bringing it to an end. To dissolve your partnership, you must first get the permission of all the owners of the business. Your partnership agreement will usually detail the process for dissolving your partnership. 

Form the Company

Once you have dissolved the partnership, you can then start to form the company. First, you must decide what each partner’s shareholding will be and whether you want to bring any new investors on board. You must also decide who will be the director of the company. Directors are under certain duties and must act in the best interests of the business.

Secondly, to set up your company, you must register it on the companies register. You must also ensure you follow all your tax obligations and any relevant company law. Once you register your new company, you can transfer your assets to the new company. Likewise, be sure to register any relevant contracts to your new company. 

Your tax obligations will change once you change to a company. Hence, you need to inform Inland Revenue at least 21 days before changing your business structure. 

It is also prudent to guarantee you have all the relevant documentation for setting up your company. In the case of a dispute between shareholders or directors, you have to have legal contracts that you can enforce. 

Why Form a Company?

There are various reasons why changing your business structure from a partnership to a company is more beneficial. The main advantage of setting up a company is that company owners have limited liability. Therefore, if the company were to become insolvent, the shareholders are not legally liable to foot the bill. Accordingly, their personal assets remain safe.

Further, a company structure is more suitable for growth. If you are looking for financial support, a company, being a more formal business structure, is more favourable to investors or banks.

Key Takeaways

It is common practice for businesses to change their structure if they have grown or it is more effective for their business to change. One of the most common changes is switching from a partnership to a company structure. This is so that the business can be a separate entity and give the shareholders limited liability. It also means that the business can be easier to sell once the time comes. To change your structure you must first dissolve the partnership and then form the new company. 

For any legal assistance with business structures in New Zealand, contact LegalVision’s business lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Do my employees need to know I am changing my business structure?

There is no legal obligation to tell them, but it is always best to keep your employees in the loop about business changes.

Does there have to be multiple shareholders of a company?

No, one person can own the entire company. However, this is unlikely if you are changing from a partnership.

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