Sole trader to Company: How and when to make the change

The vast majority of entrepreneurs start with a sole trader structure. But as the business grows and develops, the benefits of becoming a limited company become apparent and often necessary. Transitioning from sole trader to company will affect your obligations and how your business is run. It’s important to make the switch at the right time and understand what’s involved. Here’s what you need to know about moving from a sole trader to company.

Why change?

Reasons for changing your business structure from sole trader to company could include:

  • To limit your personal liability or access greater legal protection between yourself and third parties (i.e. suppliers, employees etc.)
  • To access company tax rates, as opposed to individual tax rates, thereby lowering your tax liability.
  • To attract investors or position your business for future growth.

Sole Trader vs Company

As a sole trader, you have full control over your assets and business decisions, and fewer financial and tax obligations compared to owning a company. This is the simplest and cheapest business structure to establish. You’re also legally responsible for all financial aspects of your business. That means, if things go wrong, your personal assets can be seized to pay off any debts.

Companies are considered to be separate legality entities. As a director of a company, your personal liability can be limited when it comes to paying off debts. The flip side is that you’ll have more legal, tax and compliance responsibilities to adhere to. There are some important differences between sole trader and company structures. For example:

  • Companies are subject to an annual review by the Australian Securities Investment Commission (ASIC). Sole traders aren’t.
  • Companies must maintain financial records that comply with the Corporations Act 2001.
  • Company directors have to lodge two tax returns – their own and a company tax return. Sole traders only lodge an individual tax return.
  • Sole traders don’t pay income tax the first $18,200 they earn. For companies, there is no tax-free threshold.
  • Sole traders pay the individual tax rate that corresponds to their income. Companies pay the standard company tax rate of 27.5%.
  • Sole traders may qualify for a discount on Capital Gains Tax (CGT). Companies won’t.
  • Read more about these differences at Business.gov.au.

How to make the change

If you’ve decided that changing from sole trader to a company structure is the right move for your small business, and you’re aware of the associated responsibilities, here are the next steps:

  1. Cancel your existing Australian Business Number (ABN) and reapply under your new structure. Read more about applying for an ABN here.
  2. Register your new company for taxes via the Business Registration Service.
  3. Fill out and submit a 201 Application form on the ASIC website. You’ll also need to pay an application fee.
  4. Consult your accountant to ensure all responsibilities associated with the change from sole trader to company are met.

Making the change from sole trader to a company is a big step. It’s important to always seek financial and legal advice before making any decisions that could impact the future of your business.

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