If there's anything harder than running your own business, it's changing from being a sole trader to a partnership or a company. Not only do you need to adjust to a whole new way of operating, you also have a ton of paperwork to do. In this blog, we outline how to change your business from a sole trader to a company and what you'll need to do so.
The first and most important thing you should do is research. Thankfully, the Australian government has made it easy for sole traders to find information and applications online, avoiding the need for you to be there in person.
1. Do your research
Every business type is different, with varying forms of operations, legal mandates, and liabilities. That's why you should know what you're getting into by changing your business type. When you transition to a company, you'll need to officially register a business name, take measures to protect it, and renew it to maintain your name.
Here's a quick checklist of things you'll need to do:
Check if your business name is available on the Business Register's website.
Register your business name with the Australian Securities and Investments Commission (ASIC). You can check your registration fees on their price calculator. It may take between 2 to 5 business days for your business name to be approved.
You can register your business name for either 1 year or 3 years. Whichever you choose, you'll have to renew your registration at the end of that period.
To protect your business name, consider applying for a trademark.
Understand the cost and functionality differences between a sole trader and company
It's considerably cheaper to be a sole trader than it is to run a company. Here are some major differences between the two.
You don't need to register your name. A sole trader is exempted from business registration. Starting a company, on the other hand, requires more meticulousness.
Sole traders only need to keep their business records for 5 years, whereas a company needs to maintain their financial and operational records for up to 7 years.
As a sole trader, you become personally liable for any losses your business incurs. This means you're also taking on the responsibility of making sure your business survives an economic downfall. In the case of a company, though, the business exists as a separate legal entity. This structure protects individual board members of a company from losing their personal assets if business fails.
A company is run by a board of directors. Every major decision needs to go through and be approved by the board before it's implemented. When you're a sole trader, though, you have complete control over the business—in a way, you're accountable to no one but yourself.
Tax requirements for sole traders and companies
Sole traders are entitled to a tax free threshold that companies aren't. For instance, as a sole trader, you don't have to pay taxes if you make less than a specified annual revenue. For the 2020-2021 financial year, that amount is $18,200.
Aside from tax-free benefits, sole traders' tax rates depend on their individual income. A company always pays taxes, regardless of how much they earn. The actual amount of tax varies based on revenue. Here's a complete run down of how much tax you can expect to pay as a company.
Have a look at the more granular differences between a sole trader a company on the Australian Government's Business website.
2. Register your business name
As we mentioned earlier, if you intend to start a company, you need to apply to register your business name. This applies even when you're transitioning from a sole trader business to a company. You can register your business name online on the Australian Business Register's website. Have a look at our comprehensive guide about how to register your business name.
3. Transfer your assets
When you operate as a sole trader, you purchase all assets you need to run your business on a day to day basis. This includes computers, machinery, seating systems, lighting, and even any software and point of sale systems you might be using. When transitioning over to a company, you need to transfer all those assets from your name to the company's legal name.
4. Cancel your ABN
Just as the case with transitioning from a sole trader to a partnership, you have to cancel your ABN when you transition to a company as well. You can cancel your ABN online, but before you do, make sure you've recorded your business activity statements and lodged your final tax returns as a sole trader. You can cancel your ABN on the Australian Business Register's website.
Learn more: Transferring ownership of your sole trader business vs starting a partnership