Should You Convert From A Sole Trader To A Company and or Trust?

Oftentimes, the most important part of any endeavour we choose to take is the first step: that’s why converting from a sole trader to a company or trust structure should be considered carefully.

Fielding their own business is a dream that many entrepreneurs and would-be-CEO’s share, but both sole trading and a company or trust structure hold their own advantages and drawbacks. Understanding which structure suits your needs (both current and future) is vital to ensuring your financial success. You might be able to net more profit initially as a sole trader due to the Tax Free Threshold, whereas changing to a business could be the best step forward if your operations are ready to scale.

Read on to discover in detail if you should change from sole trading to a business!

Why Change From Sole Trading To A Company or Trust Structure?

Deciding to make the change from a sole trader to a business can bring significant upheaval and drastic changes to how you operate. This is why most businesses only make the change under very distinct conditions.

 Typically, as a sole trader you will make the change because of the following reasons:

  1. Changing to a company and or trust structure limits your personal liability, as the company itself will act as a separate entity between you and any third parties you deal with.
  2. If your income surpasses the “magic number” (around $117,000) then you stand to gain more by converting to a company and or trust for tax minimisation purposes.
  3. Operating as a company and or trust lends you a certain degree of authenticity and professionalism. Some, though not all, businesses will be more reluctant to work with a sole trader. This is because a company or trust structure displays a degree of stability and professionalism that other businesses are happier to work with – particularly larger, more well-known ones.
  4. In terms of legal liability and payroll, you will most likely consider changing to a company if you are planning on hiring employees.

The Advantages Of Each

As we mentioned before, both operating structures have their advantages that bear consideration.

Sole trading is a much more straight-forward operating structure: as the sole owner, you will have full responsibility over the business direction and assets. Furthermore, there will be significantly less obligations tax-wise for you to worry about.

The primary advantages of sole trading are:

  1. As a sole trader, you will not pay income tax on the first $18,200 income that you earn. This is especially enticing for small businesses.
  2. You pay your individual tax rate as a sole trader.
  3. A sole trader may potentially qualify for a discount on capital gains tax.
  4. Business operations are straight-forward and you have control over business direction and decisions – as you are the only employee.
  5. As a sole trader you are entitled to all profits, without having to worry about paying wages.

On the other hand, changing to a company and or trust structure is a great choice for businesses that have grown beyond the capabilities of sole trading. This typically occurs when you as a sole trader are earning enough income to take on new employees and additional responsibilities. 

The primary advantages of a company structure are:

  1. Businesses operating under the company structure will have their tax rate capped at 27.5% (remember that “magic number?” If you’re making more than $117,000 as a sole trader, you will spend more on tax than if you were a company.). A Trust never pays tax and can distribute profits among the trustess.
  2. Reduced personal liability and increased personal asset protection.
  3. Improved business expansion potential
  4. Companies are subject to grants and incentives from the government, particularly small businesses. (Such as Research And Development Tax offset, and Travel Allowance.)
  5. A company and or Trust structure is much more appealing for attracting investors and business partnerships

How To Make The Change

If you’ve decided to make the change from sole trading to a company and or Trust structure, then the transition is thankfully not that complicated. You’ll need to apply for a company name through ASIC and ABN for your company (this must be separate from your sole trading ABN.) If you open a trust along with the company, you will also need to set up a TFN and ABN with the trust.

However, even though the transition may be simple, the new responsibilities you’ll be taking on will not be quite so simple. It’s important that you understand and are aware of what you’re personally liable for as the new company and or trust owner. A owner takes on a tremendous amount of new obligations.

If you’re on the fence about whether or not to convert to a company and or trust structure, or if you’re wondering what set of obligations you’ll have to be concerned with as director and or trustee, then contact The A Firm today. Our brilliant team of accountants and strategic advisors possess a wealth of experience in navigating the responsibilities of a company and trust structure. Our professional team can also help you evaluate whether now is the right time to make the change or not. Let The A Firm secure your business’s future today!