Your business is meant to evolve and as it does, you might find something that was once appropriate no longer suits your needs.

This could be the size of your commercial space, your payroll system or even your entire business structure. In Australia, it's not uncommon for growing businesses to transition from a sole trader to a company structure. Before making the change, however, there are certain things to be aware of.

Is transitioning to a company structure part of your business plan? Is transitioning to a company structure part of your business plan?

Why would I change from a sole trader to a company?

Sole traders and businesses are taxed differently – where sole traders are taxed as individuals, companies are taxed as a separate entity.

When it comes to taxes, there are a range of differences between sole traders and companies, including how you report income (type of return), what you are and aren't required to report and the tax rate. While companies pay tax at the corporate rate (27.5 per cent for certain SMEs), sole traders pay based on their personal marginal rate. 

There are also clear distinctions in regards to:

  • Paperwork and bookkeeping;
  • Ongoing costs of operation;
  • Who is liable for business debts;
  • How business income is assessed;
  • Employment regulations; and
  • Control of the business.

So, why might you want to transition to a company structure? When you operate as a company, your personal assets are protected to some extent from business losses and issues. Furthermore, income can potentially be split between owners – which can be advantageous around tax time. If you have big plans for growth, you'll also likely want to make the switch, as companies have a greater ability to bring on new co-owners. 

It's important for sole traders to weigh each factor before deciding if a company structure is more suitable. At Accountants Australia, our small business advisers can help you understand the distinctions further and make an informed decision.  

How do I make the change from a sole trader to a company?

If you've decided to make this change as part of your small business strategy, you know what it will mean for your business, but what about for you? The role of the company director or officer will expand, so be sure you understand what you're personally liable for as well as your new obligations. Under the Corporations Act 2001, directors are required to perform a number of duties that range from preventing the company trading while insolvent to reporting to avoiding conflicts between company and personal interests. 

Next, you'll have to apply for a company name through ASIC, then apply for a new ABN, as well as for other registrations, such as GST and PAYG withholding.

From here on out, things will be new for you – taxes, responsibilities, asset protection and operational costs are all a bit different for companies. That said, it's a necessary step in growing your business – ensure you have the right advisers in your corner, and the transition will be seamless.

To find out more about whether you should make the switch from a sole trader to a company, or for some assistance with the change itself, reach out to the team at Accountants Australia.