If you’re a sole trader with a growing business, there will inevitably come a time when the question arises of whether to switch your business structure to a company instead.
Some of the key differentiators include:
Tax issues: While as a sole trader there is a tax-free threshold of $18,200 when you are operating as a company you will pay tax on the amount that company earns. The company tax rate is currently 27.5 per cent if you’re a small business with an aggregated turnover less than $10 million.
Operating as a company you can opt to be paid as a director and shareholder or you may choose to only take a small salary and make up the rest of your earnings through dividends.
Responsibilities: As a sole trader, your overall responsibilities are relatively simple. Once your business is up and running, your responsibilities as a sole trader include submitting self-assessed tax returns, ensuring employees are paid correctly and have the appropriate insurance, making Superannuation payments for employers, and implementing up to standard Work Health and Safety procedures amongst other things.
Operating as a company means you’ll pick up some new responsibilities. For example, there is a higher level of compliance required, including keeping financial records for seven years in accordance with the Corporations Act 2001. The company will also need to lodge a tax return as well as your personal tax return. You’ll also have a legal responsibility to ensure the company meets its pay as you go (PAYG) withholding and super guarantee charge (SGC) obligations.
Companies often find it much easier to attract investment and capital, given that passive investors can confident they won’t be legally obliged to contribute further funds to the company in the event of financial difficulty.
Personal liability and assets: Sole traders are personally liable for any financial or business tax debts. There is no distinction between business assets and personal assets, meaning that your possessions can be liquefied or repossessed to pay off business debts.
As a company director, you are personally liable for all tax debts and keeping on top of PAYGW and SGC obligations is also important.
Ongoing costs to operate as a company structure: Unless you fall within an exemption clause, as a sole trader you’ll need to register a business name and keep its registration up-to-date. The cost of a business name registration is $35 for one year or $82 for three years.
Aside from tax payment obligations, there are a number of other regular financial costs included in the upkeep of a company as a director. Registering a company, reserving a name and bank fees are all included in the costs of the company.
You may have to pay a little extra, but it’s important to see the bigger picture. Unless wound up, companies can exist indefinitely, regardless of the retirement or death of any managers, directors, shareholders or owners. It’s also much easier to transfer ownership of a company than it is as a sole trader business.
Realise Business is holding an informative seminar on the 29th of August for sole traders looking to make the change to operating under a company structure.
Hosted by expert accountant Nathan Rigney from NGR Accounting, the presentation will allow people to understand their roles to the fullest and prepare them to succeed.