Are you tired of paying high taxes on your business income? Do you want to protect your assets and minimise your tax liability?
Choosing the right business structure is crucial for achieving these goals. As an experienced Public Accountant and Registered Tax and ASIC Agent, we have helped numerous businesses and individuals in Australia optimise their business structures and achieve financial success.
In this article, we will discuss the different types of business structures and how you can change your business structure to improve your tax situation.
4 Types of Business Structures
The first step in optimising your business structure is to understand the different options available. In Australia, the most common business structures are:
- Sole Trader – An individual person is the owner of the business and operates on their own.
- Partnership – Couples or groups running a business together as equals.
- Company – A separate legal entity run by directors and owned by shareholders.
- Trust – People or companies running a business for the benefit of beneficiaries.
Each of these structures has its own advantages and disadvantages, depending on the nature of your business and your personal goals.
For example, a sole trader structure is the simplest and easiest to set up, but it offers no protection for your personal assets and can result in higher tax rates. On the other hand, a company structure provides better asset protection and lower tax rates, but requires more administrative work and has higher compliance costs.
Changing Your Business Structure
Once you have chosen the optimal business structure for your business, it is important to consider whether you need to change it over time. As your business grows and evolves, your needs and goals may change, and your business structure may no longer be the best fit.
In particular, if you are currently a sole trader, you may want to consider changing to a company structure to achieve better tax outcomes and protect your assets.
Why Change from Sole Trader to Company?
There are several reasons why changing from a sole trader to a company structure can be beneficial for your business:
- Lower Tax Rates
Companies are taxed at a lower rate than individuals. For example, the current company tax rate in Australia is 25%, while the top personal income tax rate is 45%. By changing to a company structure, you can significantly reduce your tax liability and keep more of your hard-earned income.
- Asset Protection
Companies offer better protection for your personal assets than sole traders. As a sole trader, you are personally liable for any debts or legal claims against your business. This means that your personal assets, such as your home or car, could be at risk if your business faces financial difficulties. By incorporating your business as a company, you can separate your personal and business assets and protect your personal assets from business risks.
- Improved Credibility
Having a company structure can improve your credibility with customers, suppliers, and investors. A company is a separate legal entity with its own ABN and ACN, which can make your business appear more professional and established. This can help you attract more customers, secure better supplier deals, and access funding from investors.
How to Change from Sole Trader to Company
If you’re a sole trader looking to change to a company structure, it’s best to enlist the help of an experienced accountant right from the start. The first step is to determine whether or not it’s the right move for your business. Consider the benefits and drawbacks of each structure and weigh them against your business goals. If you decide to move forward with the change, here are the steps you should take:
- Register your company: To register a company, you’ll need to choose a company name, appoint directors, and decide on the company’s share structure. More often than not, you’ll also need to apply for an Australian Business Number (ABN), GST Registration, and a Tax File Number (TFN).
- Notify the ATO: You’ll need to inform the Australian Taxation Office (ATO) of your change in business structure. This usually involves cancelling your current ABN and registering for a new one.
- Transfer assets: You’ll need to transfer any assets that were in your name as a sole trader to the company. There can be tax implications here, so it’s important to have expert help.
- Update contracts: You’ll need to update any contracts with suppliers, customers, and employees to reflect the new company structure.
- Notify stakeholders: Inform your stakeholders, including customers, suppliers, and employees, about the change in business structure.
- Seek professional advice: Changing your business structure can have legal and financial implications. Seek professional advice to ensure that you’re complying with all the legal requirements and that the change will benefit your business.
While it may seem like a lot of work, changing from a sole trader to a company structure can have significant benefits for your business. It can help protect your personal assets, provide access to more capital, and create a more professional image.
Conclusion
Choosing the right business structure is an important decision that can have a significant impact on your business’s success. Each structure has its own benefits and drawbacks, and what works for one business may not work for another.
If you’re considering changing your business structure, it’s important to weigh the pros and cons and seek professional advice. Making the switch can be a daunting process, but with the right support, it can be a smooth and successful transition.
A professional advisor can also determine whether you should have a mix of different business structures. This will depend on a few factors, such as:
- Entity size
- Nature of business
- Financial performance
- Stakeholders involved
The right mix for your business structure can aid you in running your “empire” in the most profitable way.
At Accountants Direct, we’re here to help you make the right decision for your business. Our experienced team of Public Accountants and Registered Tax Agents can guide you through the process and ensure that you’re set up for success. Whether you’re a sole trader looking to change to a company structure or a company looking to restructure, we’ve got you covered.
Don’t let your business structure hold you back. Contact us today to find out how we can help you take your business to the next level.
Stephen is the CEO of Accountants Direct and is a Professional Director, ASIC Agent, Startup Advisor & Investor & Capital Raising Specialist.
Contact Stephen or his team if you have any questions about this post or any business matter in general.
