Changing from a sole trader to a company

The structure you choose when you set up your business isn’t set in stone. If you get to the point where it makes sense to change from sole trader to company, the process of changing your business structure isn’t too complicated.

The reasons to change from a sole trader to a company

One of the most common changes for businesses in Australia is to move from being a sole trader to a company. This is not a decision to be made lightly, but there can be good reasons to consider the change:

• As you grow financially, you may be better off operating under a company tax bracket
• Some clients prefer to work with companies
• It’s often easier to get investors as a company
• A company offers better legal and asset protection
• Operating as a company can give others a better impression of your business.

The benefits of operating as a company

One of the biggest differences between a sole trader and a company is that the shareholders of a company enjoy more legal protection. As a sole trader, if someone sues your business, all your personal assets will be at risk. If someone sues a company, your personal assets will be protected.

Companies also enjoy a different tax rate, so depending on your circumstances, you may end up paying less by changing your business structure.

If you are the only director of a company, you’ll enjoy the same freedoms as you would as a sole trader, but you have to keep a record of any major business decisions. If you don’t do this and later bring on partners, anything you have previously decided could be ruled invalid.

The legal obligations of a company

Operating as a sole trader is perhaps the most convenient business structure, as it involves the least paperwork and the lowest setup costs.

As a company, you’ll have a few extra responsibilities, such as registering your company every year and reserving a company name. It’s also a legal requirement that you open a separate bank account for your company.

As a company director, you’ll have to make sure you complete two tax returns every financial year – one for your business and one for yourself. While tax records must be kept for at least five years, financial records must be kept for seven years.

Other obligations include having a registered office and regular meetings (with recorded minutes). You must also notify ASIC about any major changes that occur. 

The process of changing your business structure

To start the process, you need to inform ASIC of your intentions by registering as a company. Once this is approved, you will be given an ACN (Australian Company Number). You should then cancel your sole trader ABN (Australian Business Number) and apply for a new ABN as a company.

Although you can't transfer your ABN from sole trader to company, you can transfer the registration of a business name. Depending on your financial status, you may also have to consider applying for GST and PAYG withholding.

You should also consider which assets you want to be owned by you and which should be owned by your company. This includes physical assets such as phones and vehicles and intangible assets like trademarks and licenses. These decisions will have an impact on taxes and have other financial pros and cons.

Once you’ve done this, there are also ongoing paperwork considerations. If your company details change in any way – for example, if the directors change – you have to update your ASIC records within 28 days.

There’s a lot to get your head around with business restructuring. Find out more by downloading our free ebook Business structuring or call us on (02) 4044 1245.