Many business owners start out as sole traders. As a sole trader, you – the business owner – are the business. You have a registered business name, an Australian Business Number (ABN), and if turnover exceeds $75,000 p.a., you are registered for GST, writes Rolf Howard, Managing Partner at Owen Hodge Lawyers.
You still only file your personal income tax return, albeit with the business schedule supplement, and you pay tax on the profits from your business at the standard personal income tax rates.
You are the business entity. You are totally responsible, and completely liable – even your personal assets, including your home in joint names, are at risk if things go bad.
Being a sole trader is a straightforward and relatively simple place to start. But a successful and expanding business will outgrow that structure.
Here are a few options available to sole traders looking to shift to a more mature business structure
A partnership is a structure whereby two or more people co-own and operate the business. This can be with a colleague with complementary skills and ambitions, or a partner or spouse. Income (and losses) can be shared, and risk can be somewhat diversified. A written partnership agreement is highly advisable as verbal arrangements can be fraught.
While a partnership is perhaps a step in the right direction, for a successful and expanding business, the next step may be to form a company.
A company is a legal entity in its own right and will have its own ABN. You cannot transfer your current ABN. It will also have a business name, but your current sole trader business name can be transferred and owned by your new company.
A company needs to be registered with and overseen by ASIC, and there are several requirements, essentially:
Establish a registered office and place of business.
Create and maintain your business name.
Keep appropriate financial records.
Keep ASIC advised of any changes.
Pay ASIC fees (which are not onerous).
Most small companies are established as Proprietary Limited companies, which is to say that the ownership (proprietary) of the company is limited to 50 non-employee shareholders. Further, the company has limited liability and therefore provides a layer of protection between you and third parties.
Small companies are required to have a minimum of one director, and in the first instance, that will be you. As a company director you will have responsibilities and liabilities. These are really just common-sense requirements for good governance, but it is important that directors comply with the rules, as failure to do so can have ramifications.
Since the company is the business, it must submit its own tax return, and will pay tax at the company tax rate. Currently, the standard rate is 30%, though in some circumstances this may be reduced.
A company structure:
Enables ready access to expansion with like-minded investors.
Provides credibility with banks and financiers, clients, and suppliers – the Pty. Ltd. label
Opens opportunities to contracts that are only available to companies.
Limits personal liability to the owners.
May well reduce the tax payable.
Provides tax offsets for some R&D and other activities.
Provides easier succession planning – the company will continue to exist until wound up.
When it comes to changing your company structure, with an experienced company lawyer to advise you and an astute accountant to provide appropriate support where needed, you will be able to get on with what you do best – keep your business trajectory on track towards the next stage.
If you’d like more information on the structure of your small business, call us on (08) 8363 9222.
Source: Flying Solo September 2021
This article by Rolf Howard is reproduced with the permission of Flying Solo – Australia’s micro business community. Find out more and join over 100K others https://www.flyingsolo.com.au/join.
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