When Is It Time to Make the Switch from Sole Trader to Company Boss?

Have you outgrown your Sole Trader status? Ready to hit the game big time?

Switching your business structure from Sole Trader to a Company has many benefits – especially from an asset-protection standpoint. But, it comes with higher costs.

So, how do you know when the time’s right to farewell your simple, low-cost business life and play with big kids?

Recognising the Signs

There are a few scenarios which might lead you to switch from Sole Trader to Company Boss. Here are the most common signs to tell you when the time might be right.

1.    Tax Purposes

Here’s the thing – Sole Trader’s pay the standard individual marginal tax rate. So, if you’re a bad-ass Sole Trader making more than $87,001 in your business (good on you!), you could be paying up to .45c in tax for every dollar profit.

Why does this matter?

Well, the standard small business Company tax rate is 27.5%. Hmm.

In fact, every dollar profit earned over $37,001 as a Sole Trader, will net you a higher tax rate than the small business Company tax.

But – there’s a but.

If you’re the sole operator of a Services business (even if you switch to a Company structure), you might still be taxed at the same individual marginal tax rate as if you were a Sole Trader. In this instance, the ATO see your income as Personal Services Income (what a drag).

If this applies to you, then a general guide is once you start netting more than $117,000 as a Sole Trader/Operator, you should consider switching to a Company structure to access the full benefits.

2.    You want to sell your business

If you’re looking to cash out of your beautiful little empire – it’s worth noting that Sole Traders are completely liable for any resulting tax from a business sale. (Did you know this is the case with trail books too?)

However, under a Company structure – shareholders pay the tax. If you’re looking to sell, talk to one of our clever accountants about some strategies you can explore to manage this process.

3.    You want to grow your business

You’re set to build the business empire of your dreams! We’re excited for you. This also might spell time for you to switch to a Company structure.

If you need to raise capital or apply for a loan to fuel your business growth – you’ll have more luck operating as a Company. Sole Traders requiring additional funds will generally need to secure their loan using personal assets, like the family home.

On the other hand, a Company has more credibility and leverage for lenders and investors relying on Company assets and shares.

4.    You’ve grown your family wealth

Perhaps you’ve been saving all your hard-earned Sole Trader pennies, and you’ve started building your personal wealth and asset bank. Again, good on you!

But, did you know that Sole Traders are personally liable for any business debts, losses, or legal pursuits? If your business takes a turn, or if a customer bails on you and leaves a hole in your cash bucket – you’re personally liable to cover any losses. A creditor could come and take your personal assets, like your car, super, or house, to repay any monies owing.

A Company structure is beneficial in this instance as it becomes a separate legal entity. It limits your personal liability; the liability of Directors and Shareholders. Check out our previous post to understand how you can use Companies and Trusts to separate your assets from business risks.

Talk to Your Awesome Accountant

Do you recognise these signs?

Before you make the switch, we recommend getting in touch with your accountant to discuss your situation and your short and long-term financial needs (personal and business).

Company structures are complex and are therefore more expensive to set up and run. There are also increased reporting requirements, tax, and legal obligations, so, you’ll want to partner up with a great accountant to ensure your Company is being compliant.

Get in touch if you’d like to learn more.