It is not out of place to start your business as a Sole Trader, but if indeed you want to grow and expand, you would need to change your business status from Sole Trader to a Company. The truth is that if your intention is to grow the business and have distribution networks and service centers spread across Australia and other countries of the world via franchising, then choosing a sole trader is not an option for you.
Possibly you realized that operating as a sole trader puts your personal savings and assets at risk should your business incur any debt or be sued; or perhaps you want to take on a new client who requires you to operate as a company (an LLC or corporation). This is why you must change to a limited liability company as soon as you can.
A sole trader business structure is the simplest and cheapest to set up. As a sole trader, you have full control over your assets and business decisions, and fewer financial and tax obligations than if you own a company. Operating as a sole trader means that you will also be legally responsible for all financial aspects of your business.
The implication is that your personal assets – such as your house or your car – can be seized to pay off any debts if the business runs into financial trouble. It is important to state that there are some key differences between a sole trader and company structures and the differences are:
- Companies are subject to an annual review by the Australian Securities Investment Commission (ASIC); sole traders aren’t.
- Companies must maintain financial records that comply with the Corporations Act 2001.
- Company directors have to lodge two tax returns – their own and a company tax return. Sole traders only lodge an individual tax return.
- Sole traders don’t pay income tax on the first $18,200 they earn. For companies, there is no tax-free threshold.
- Sole traders pay the individual tax rate that corresponds to their income. Companies pay the standard company tax rate of 27.5 percent.
- Sole traders may qualify for a discount on Capital Gains Tax (CGT); companies won’t.
If indeed you have made up your mind to change your business status from Sole Trader to a Company in Australia, then you would find the 10 steps outlined below very useful;
10 Steps on How to Change from Sole Trader to Company
STEP 1: Research to Make Sure Your Business Name is Available
You must make sure that the name you want to use is not already taken. You can be check if the name is unique by searching the name on your State Website. Also, make sure your business can use its name as a web domain. Even though creating a business website is not on your plan, it is best you purchase the URL to stop others from using it.
After you have registered a domain name, consider creating a professional email account. A professional email that makes use of your domain name is vital to establishing trust between your business and its customers. In this modern era where scam is on a high, companies need to make use of a professional email address to provide a sense of professionalism and credibility.
When you choose your name, then you must reserve the name. When you have chosen a name, reserve it by filing a Name Reservation form. To check the availability of a name, you can contact your state’s secretary of state office (some states offer an online searchable database). Another option is to have an online legal filing service do the search for you – and many sites will offer this basic search for free.
STEP 2: Register Your Company
The next step to take is to register your company. In Australia, you can register your company through the Business Registration Service. This service allows you to apply for an Australian company number (ACN), company name, Australian business number (ABN), business name, and other key business registrations at the same time.
It is very important to state that you can’t legally start a business in Australia if you don’t own an ABN. This is an 11-digit number that is unique only to your business and acts as a government identifier for the business. Immediately you have got an ABN, you will be able to:
- Register your business name
- Identify your business to other entities for things like ordering goods and services or sending invoices
- Claim taxes such as Goods and Services Tax (GST)
- Avail of credits for things like energy grants
It is very much advisable you take your time to decide on your business name before you go about creating assets like your website URL, logo or any other designs. Otherwise, you will need to change everything in the event your business name changes.
Also, when creating a business logo, it’s worth considering if you need to patent it to protect yourself from copyright infringement. Note that you can register your ABN and business name separately if you wish, but it’s easier to apply for both at the same time.
STEP 3: Create Your Company Operating Agreement
An Operating Agreement lists the rights and obligations of the members of the company. These include rules on how the company should be run, how taxes are to be paid, and how profits/losses are to be shared among the members. The Operating Agreement also contains the list of members of your company and how much their stake is in the business.
Even if you have a Single – Member company (you are the only owner), it’s still best practice to have an Operating Agreement. Please note that it is not mandatory to send the Operating Agreement to your State Department of Assessments and Taxation, or to any other state agency. Just give a copy to any necessary members and keep a copy with your company’s business records.
In case your company is sued, having an Operating Agreement shows that your company is operating properly. This helps maintain your personal liability protection. Please note that the operating agreement can just be a few pages, and you can find some samples on the Web. Even if your state does not require an operating agreement, it can be an important document to help clarify verbal agreements and prevent misunderstandings.
STEP 4: Transfer Assets
If you are successful in registering your company, the next step to follow is to transfer any licenses and assets (including trademarks and other IP) to the new company.
STEP 5: Cancel Your ABN
If you have been using your sole trader ABN to do business, you will need to cancel it. You cannot transfer your sole trader ABN to your new company. When you close your business, you will need to cancel your ABN. Find out how to cancel your ABN, and what other registrations are affected. You should cancel your ABN if your business:
- has been sold
- has closed down
- has changed business structures
- is no longer operating in Australia or making supplies connected with Australia
Before you cancel your ABN
Before you can cancel, you will need to meet the lodgment, reporting, and payment obligations for all the government agencies you deal with. It is recommended you wait to cancel your ABN until all processes are completed.
Your business might need to:
- lodge activity statements
- lodge pay as you go (PAYG) withholding reports
- repay goods and services tax (GST) credit refunds
- pay outstanding tax debts
- Other registrations will be canceled
- Be aware that canceling your ABN will also cancel your registration for:
- any representative holding a login credential for your business. This may prevent you from using some government online services
- GST, luxury car tax (LCT), wine equalization tax (WET), and fuel tax credits (FTC)
Cancel your ABN
You can cancel your ABN online through the Australian Business Register. Before you cancel your ABN, it is important that you check:
- If you have met the lodgement, reporting, and payment obligations for all the government agencies you deal with and that all processes have been completed.
- Please that, if you want to cancel your pay as you go withholding, you must cancel it before you cancel your ABN.
- If you can’t cancel your ABN online, there are other options available to cancel your ABN.
- Call the Australian Business Register on 13 92 26 between 8 am and 6 pm, Monday to Friday. You must be recorded as authorized to update ABN details for your business. You will also need to prove your identity. It is a good idea to have your tax file number (TFN) handy to do this.
- Lodge an Application to Cancel Registration form. Order this form online by searching for NAT number 2955.
- Ask your registered tax agent or BAS agent to cancel your ABN.
STEP 6: Open a Corporate Bank Account
It is international best practice to have a business checking account for your company in order to maintain your personal liability protection. Using a personal bank account for your company is called “commingling of assets” and this can lead to personal liability issues if you end up in court.
Please note that having a separate business bank account for your company also makes record-keeping easier for accounting and tax purposes. Since banks in Australia have their own rules and regulations, it is recommended calling a few places to determine the following:
- minimum initial deposit
- minimum balance requirements
- monthly maintenance fees (if any)
N.B: Call the bank ahead of time and double-check what documents are required. Please note that if you had a business bank account for your sole trader business, you will need to close that account and open a new one in the company’s name.
STEP 7: Securing Business Licenses and/or Permits
The next step you are expected to take is to secure your business license and permits as the case may be. Please note that in order to operate your Company, you must comply with federal, state, and local government regulations. For example, restaurants likely need health permits, building permits, signage permits, etc.
The details of business licenses and permits vary from state to state. Make sure you read carefully. Don’t be surprised if there are short classes required as well. Fees for business licenses and permits will vary depending on what sort of license you are seeking to obtain.
STEP 8: Sort Out Taxes
In Australia, sole traders and companies have similar tax and reporting obligations, but you should be aware of the key differences. The tax-free threshold for individuals is $18,200 in the 2019–20 financial year. A sole trader business structure is taxed as part of your own personal income BUT there is no tax-free threshold for companies – you pay tax on every dollar the company earns.
Sole traders pay tax at the individual income rate whereas the full company tax rate is 30 percent. Different company tax rates apply to companies that are base rate entities. You can keep up to date with any changes to company tax rates on the Australian Taxation Office website.
An individual tax return needs to be lodged each year if you operate as a sole trader business. As a separate legal entity, the company must lodge its own tax return and pay tax on income. If you are a director or employee of your company, you still need to lodge your own individual tax return. Your business activities determine which taxes and superannuation you may need to pay and report.
Please note that as a sole trader or a company, you can employ people. If you do, you may have a payroll tax obligation. Payroll tax is a state and territory tax on the wages you pay as an employer. Each state and territory government has its own payroll tax rules that you will need to comply with.
STEP 9: Apply and Obtain Your Business Phone Number
Instead of using your home telephone number or your cell phone, you can purchase an affordable “virtual business number” specifically for your company. You can set this virtual business phone up to forward to your cell phone, go through voice prompts, or configure it any way you’d like.
You can check out different telecommunication companies as they have the cheapest plans and their customer service is excellent.They offer local phone numbers as well as toll-free numbers. You can easily set up call forwarding, pre-recorded prompts, and get voicemail messages forwarded to your email.
Getting a separate business phone number for your company is also a good idea in order to keep your actual number private from those pesky “public record” websites. There are many options to choose from when it comes to an official phone number, but just ensure that you choose a telecom company that will better serve your business.
STEP 10: Hiring of Employees
Of course, registering a company means that you will need employees and in order to get it right as regards hiring employees, you should ensure that you stay on the side of the law and here are some steps you should follow:
- Verify that new employees are able to work in Australia
- Report employees as “new hires” to the State
- Provide workers’ compensation insurance for employees
- Withhold employee taxes
- Print compliance posters and place them in visible areas of your workspace
Lastly, ensure that you find out more information from your state Department of Labor, Licensing, and Regulation website.
Changing your business status from Sole Trader to Company is not a daunting task. Even after forming it, there are still some obligations that you must meet going forward. Please note that in Australia, as a company, you will need to comply with additional reporting obligations.
The company obligations include; record keeping, lodgement of financial records, company registrations, fee payments, and notification of changes to company details, including updating ABN details on the Australian Business Register (ABR). Best of luck