Should I change from sole trader to company?
Updated: 2 December 2019
Below is a useful guide for those of you considering changing your business structure from sole trader to company.
Sole trader pros and cons
Sole trader pros
The sole trader structure is attractive because it's easy to setup.
Also, there aren’t many costs to maintain it.
And, you don’t need to pay an annual fee to keep up a sole trader structure.
In fact, your only fee will be a business name registration fee if you want to trade using a business name other than your own name.
Sole trader cons
The two main cons are tax and legal.
As a sole trader, you’ll pay tax as an individual which can get expensive as your revenue increases. The tax rates for a sole trader can be less attractive than an Australian company.
Also, you are personally liable if something goes wrong in your business.
Personal liability means that if your customer has a problem with what you’ve delivered, they’ll be suing you personally.
This is not the case with a company structure. We'll discuss that structure next.
Company pros and cons
Setting up as a company is a good idea if you plan on bringing investors on board. You can allocate shares to the investors.
Also, you’ll pay tax at the company tax rate, at the time of writing, for a company with a turnover of less than $25m the tax rate is 27.5%, which can be less than the individual tax rate.
Now, you also have the benefit of limited liability. In simple terms, this means that if something goes wrong and your customers want to sue you, your company will be liable up to the value of the company assets. Unlike the sole trader, you are not personally liable.
In fact, your company has its own legal personality. Your company can sue and be sued, own property and owe debts. Your company is separate to you. You are generally not personally liable for company debts.
So what are the cons of setting up a company, if any?
Relative to the sole trader, a company is expensive to maintain, you'll need to prepare a company tax return (separate to any personal tax return you may already have to prepare) and you'll also need to pay the ASIC renewal fee which at the time writing is around $300 per year.
Change process - sole trader to company
To change from a sole trader structure to a company structure, you’ll need to lodge an application for registration as a company (form 201) and apply for a new ABN.
And no, you won’t be able to re-use your existing ABN. This is a common question.
Your sole trader ABN will need to be cancelled because you’ll get a new one when you register for a company.
Your company number and your ABN will have the same last 9 digits and your ABN will have an extra 2 digits in front (11 digits in total).
Cost of changeover from sole trader to company structure
To change from a sole trader to a company structure, you’ll need to pay the ASIC fee. At the time of writing, this fee is about $500. If you have a professional setup your company, your registration fee can range anywhere from $500 to $3,000.
It's a good idea to make sure that the professional setting up your company clearly explains if their service fee includes the ASIC registration fee or if its separate.
And each year, you’ll need to pay an ASIC renewal fee which is currently about $300 per year.
Also, you’ll have company tax costs. These include lodging a Business Activity Statement (BAS), which you can lodge either quarterly, bi-annually or annually. Many small businesses lodge quarterly for cash flow reasons, but you should get some advice for what best suits your business.
Finally, your annual tax return can range anywhere from $2,000 upwards.
When to change over from sole trader to company
There are tax and legal effects for your changeover.
Now, while you can change your structure anytime but its best to choose your timing based on your accountant’s and your lawyer's advice.
Also, its worthwhile checking any existing supply or lease contracts for any approval required for a change in business structure before you make the change.
Your contracts may need to be changed across your business. For example, supplier contracts, employment agreements and leases because you'll be entering those agreements as the company and not yourself personally as a sole trader would.
As always, get advice if you are in doubt.
I wish you every success in your ventures!