Your existing sole-operator business has shown growth and you’re ready for expansion. You may be considering your options. A company can provide more protection and separation between your personal and business finances and give a range of tax benefits. However, many things must be considered, including legal and financial responsibilities. Here’s everything you need to know about the transition:
When is the ideal time to shift from sole trader to company?
The ideal time to transition depends on factors such as the growth of your business, the type of business you have, and your personal financial situation. Generally, if you’re witnessing exponential growth, it’s high time you shift to a company. Growth usually entails hiring employees, taking on larger projects, and expanding business operations.
That being said, transitioning from a sole trader to a company requires legal and tax obligations that are best handled with the assistance of an accountant. They can guide you through registering your company with the Australian Securities and Investments Commission (ASIC), applying for an Australian Business Number (ABN), and updating your business name and banking information.
Steps for transitioning from sole trader to a company.
Seek professional advice from an accountant to ensure you do everything legally and correctly.
- Decide on the company structure: proprietary limited company, public company, or limited company.
- Register your company with the Australian Securities and Investments Commission (ASIC).
- Apply for an Australian Business Number (ABN) via the Australian Business Register (ABR).
- If your company’s turnover exceeds $75,000 per year, register for the Goods and Services Tax (GST).
- Update your business name to reflect your new company structure.
- Have a separate bank account for your business transactions.
- Let your clients and suppliers know about the transition and provide them with your new business details, such as your new business name and ABN.
Sole Trader Vs Company
While being a sole trader provides complete control over your business decisions and assets with lesser tax and financial obligations, transitioning to a company can significantly benefit expanding businesses.
|You are the only one who carries all the liabilities.
|Multiple directors can share liabilities and responsibilities.
|You are completely liable for all legal aspects of the business.
|The company is liable for legalities and can provide protection to you personally
|You keep the profits.
|Profits are distributed and shared.
|You are taxed at the same rate as an individual. Enjoy a tax-free threshold set at $18,200.
|Every dollar you make will be taxed, typically at a 30% rate.
It’s essential to seek an accountant’s advice to avoid possible penalties and liabilities due to errors. This is a big transition for you as a business owner, but getting help from an accountant can make it a smooth process.
Frequently asked questions.
Congratulations on taking your business to the next level by transitioning from a sole trader to a company! Although there may be paperwork involved, this is an exciting time for your business. Here are some frequently asked questions to guide you through the process:
Q: Why should I restructure as a company?
A: Restructuring as a company offers several benefits, including increased credibility, fewer personal liabilities, and potential tax advantages. It can also open up more significant opportunities for growth and expansion.
Q: What type of company structure should I choose?
A: Your chosen company structure will depend on your business needs and goals. For small businesses, the most common structure is a proprietary limited company (Pty Ltd).
Q: When do I need to register for GST?
A: If your business has a turnover of over $75,000 per year, you must register for Goods and Services Tax (GST) through the ABR website.
Q: How do I update my business name?
A: If you previously traded under a business name as a sole trader, you must update it to reflect your new company structure. You can do this through the ASIC website.
Q: Do I need a separate business bank account?
A: As a company, you must have a separate bank account for your business transactions.
Q: Do I need professional advice to transition to a company?
A: Yes, it’s essential to seek professional advice from a lawyer or accountant to ensure that you meet all the legal and tax obligations when transitioning from a sole trader to a company.
Transitioning to a company can be a significant step towards achieving growth and success for your business. If you need help figuring out where to start, seek advice from your accountant or schedule an appointment with Start Fresh Accounting today!