When a business is new it often makes sense to start out with a structure that is simple and cheap to operate. So many new businesses open as either sole traders or partnerships.
Some businesses never grow out of this structure. But if your business is starting to take off or you have big plans for the future, then it may be time to consider a move to a company structure.
The telltale indicator that it is time for a change is if the earnings of your business have outgrown the product that you (or you and your partners) are personally contributing. When this happens both the value of the business and the risks associated start to grow.
Sometimes the value of the business may be rising long before sales start to rise. By creating intellectual property or developing new prospects you could be significantly increasing the future value of your business.
Once a business becomes a large asset in itself, this creates risks, opportunities and tax issues that are much better managed in a company structure.
Here are some of the key advantages that a company structure offers to a
A company structure allows you to secure money from outside parties by offering them shares in the business.
Limit your liability
As a sole trader you are personally responsible for all business debts and actions – as your business grows this responsibility grows. Shareholders and directors in a company structure have limited liability and are not personally responsible for the company’s debts, so long as they have not been fraudulent or negligent.
Company tax rates
Sole traders are taxed as individuals, with a tax-free threshold and then increasing marginal tax rates to a top rate of 45%. Companies pay 30% tax on all profits. As profitability increases, the company tax rate becomes more attractive.
Flexibility with retained profits
Sole traders have all profits taxed at their top marginal tax rate. Companies have the option to retain profits, paying the 30% company tax rate, or distribute earnings to shareholders as dividends.
If the value of your business is increasing and you anticipate that growth will continue, don’t wait too long to make the move to a company structure. The longer you wait the more complicated the transition becomes and the more likely you are to run into capital gains and stamp duty issues.
Making the move? Click here for a checklist of things to remember.
And come and see us. We can make the whole process much easier.
For more information check out these articles:
Australian Government: Key differences between sole traders and companies
ASIC: How to start a company