Choosing a business structure can be quite a headache for a new company. Most new entrepreneurs start out as sole traders and later on progress toward becoming limited companies. This decision affects your tax return, GST credit, obligations as a company director, and can play a major role in determining your business’s future.
How is Sole Trader Different Than Other Business Structures?
In Australia, using a sole trader as a company structure is the cheapest form of owning a business. As a sole trader, you have full control over your assets, cash flow, and business bank account. On the other hand, you are also the only one responsible for the actions of your small business. Which means you have a personal liability toward the company and for example, the ATO can cease your personal assets such as a car or your house in order to pay off the debts of your business.
Sole traders fall under the benefit of not paying income taxes on the first $18,200 they earn, while company structures do not get any tax-free thresholds whatsoever. And while sole traders pay an individual tax rate which is corresponding to their business growth, company structures pay 27.5 % which is the standard rate in Australia.
Of course, for such business owners, there are fewer tax obligations and financial requirements. And this is why new businesses generally start as sole traders.
What Does a Company Structure Mean?
Companies are considered an entirely separate business structure and unlike sole traders, they are separate legal entities that can take responsibility instead of an individual. By becoming a company director, you limit your personal liability by paying the price of having to face taxes at different tax rates, as well as bearing bigger legal obligations such as being yearly reviewed by the ASIC (Australian Securities and Investments Commission). You can check what the review encompasses on the ASIC website.
Moreover, as a company in Australia, you would have to maintain a regulated business bank account, as well as keep financial records that are in compliance with the Corporations Act 2001.
Another advantage is that sole traders get to file only one tax return, whereas company directors get to file their own, as well as a company tax return at the same time.
Reasons to Change From Sole Trader to Company Structure
One of the most valued qualities of a company business structure is that it comes along with limited liability over the personal liability of sole traders. Moreover, it also lowers your tax liabilities because it gives you access to lower company tax rates.
Moreover, company structures attract investors and can substantially boost the business growth of your startup.
Changing your business to a business structure also grants you access to a better legal protection between you and contractors such as employees or third party companies.
How To Change To a Company Structure?
If your small business is growing and being a sole trader no longer is the best business form for your firm, these are the simple steps to follow in order to become a company structure.
1. Cancel your existing ABN (Australian Business Number)
2. Get a new ABN and use the Business Registration Service, to register for taxes.
3. Carefully fill a 201 Application form. You can do that on the ASIC website. That would cost you a $479 application fee.
Note: ABN is the same as an Australian company number in point 2 above.
The restructuring of your company is no small deal. It might be the second most important step in defining your business after choosing the right business name. If you are confused after having done extensive research on the topic, consider seeking professional advice before leaping into the process. Carefully weigh the benefits and downsides and make an educated decision.