Changing from Sole trader to Company – Am I ready?
It can be a daunting process to transition from a Sole trader to a Company structure. Within this transition, a lot of changes are needed to be put into place. Whether it be a change in your workspace, the number of employees, payroll system or a whole new business model and structure, it can feel overwhelming.
It is important to seek professional advice when making the change in business structure to understand which structure is best for you and your new legal obligations as a company director.
First, let’s delve into the difference between being a sole trader and a company.
What is a sole trader?
A sole trader is an independent business owner whom is responsible for the business, in its entirety. The individual owns every aspect of the business, meaning they are responsible for all monetary gains and losses.
Registering as a sole trader is a popular approach to starting a small business. The structure is much simpler, start-up costs are lower and you are taxed as an individual. You can also employ staff as a sole trader, however it is important to note in most scenarios you are required to have worker’s compensation, an understanding of your tax and super obligations and your employee’s rights.
There are several differences between a Sole Trader and Company structure. We have split these key changes in the model below.
5 positive key elements of a Sole Trader
- Easy and simple to set up and run.
- Enables you to use your individual Tax File number when lodging tax returns.
- Attains a lower number of reporting requirements and is typically a low-cost structure.
- You have full control over business decisions and control over your assets.
- It is easy to change your business structure – if you’d like to close or grow the business.
5 negative key elements of a Sole Trader
- Has unlimited liability.
- Limited capacity to raise capital.
- Single-person tax, you may incur a higher tax rate than that of a company tax.
- You may struggle to find quality employees.
What is a Company?
A company is a commercial or industrial business and legal entity. Within a company, employees share a focus to achieve a common goal, relevant to their skill set and resources.
Companies can take several different forms such as financial entities and banks, business entities and voluntary organisations that can include non-for-profit organisations.
The advantages of working under this business model as opposed to working as a Sole Trader include:
- Personal Assets are protected to some extent from issues or losses within the business.
- You are likely to pay less personal tax than a sole trader – companies are taxed as a separate entity over an individual. The company tax rate is currently 30% and 27.5% if you’re a smallbusiness with an aggregated turnover less than $10 million
- Succession – It is easier to transfer ownership in a limited company.
- Professional image – a growing business may enter a company structure for operational reasons, allowing them to reorganise internal functions and structures.
It is imperative to truly understand the needs of your business and future strategy to determine the best business structure for you moving forward.
If you are considering making the transition from sole trader to company, book a consultation at Aspect Accountants and Advisors in West Perth now.
Ph: 9227 9400
27 Cleaver Street, West Perth, WA 6005