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Sole Trader or Company? When is the right time to make the switch?

By way of strict definition, a company is a legal entity formed by one or more persons. Because a company constitutes a separate legal entity, this means that the owners of the business are not liable for any debts and other liabilities of the company. Businesses were first formed thousands of years ago as a way for individuals to manage the risks associated with running a business.

But before the advent of limited liability companies (LLCs), businesses were basically structured in two ways: sole trader or partnership, as these types of business structures, are relatively easy and inexpensive to set up and run. The downside is that as a sole trader or partnership, you are held legally liable for any debts incurred by your business or any judgement made against it.

Therefore, when the time comes for sole traders to decide whether or not to pursue becoming a company, there are a series of critical factors that need to be weighed up.

When you’re just starting out in business, it’s often easiest to operate as a sole trader

Becoming a sole trader is a relatively simple and straightforward process. All you need to do is register a business name and acquire an Australian Business Number (ABN). Whether or not you register for GST will depend on the type of business you are running and the turnover.

At this early stage in your business, being a sole trader offers a number of advantages. Firstly, it’s an inexpensive option to set up a business as a sole trader, as you may not need to rent office space or hire staff. However, there are some downsides to this business structure. Sole traders are personally responsible for all debts and liabilities incurred by the business, and they may find it difficult to raise capital from investors. Additionally, sole traders have limited growth potential, as they can only expand as fast as they can individually work. For these reasons, many businesses eventually transition to a different company structure, such as a partnership or a corporation.

As your business grows and you take on employees, you may need to switch to a company structure

Starting a company is a big decision. It’s a more complex business structure than other types of businesses, and it comes with higher setup and running costs. But there are also some big advantages. For one, a company is a separate legal entity. This gives company directors limited liability, meaning they’re not personally responsible for some debts and obligations of the company.

As your sole trader business grows, you may find that you need to switch to an Australian company structure in order to raise capital, attract and retain employees, and grow your business. In addition, a company is also able to take advantage of various tax incentives and other government programs.

Deciding the right time to switch to a company structure

As the poet and philosopher Henry David Thoreau once put it: “Success usually comes to those who are too busy to be looking for it.” If you’re constantly pushing yourself and working hard, the door will eventually open for you to take your business to the next level and transitioning to a company may be part of that.

However, it’s important to assess all the factors that are relevant to your business and weigh up pros and cons before making the decision to switch. Factors such as your current financial situation, growth potential, and ability to access money will all need to be considered. Ultimately, the right time for your business to switch to a company structure will depend on your specific circumstances and goals. But with careful planning and a commitment to success, you can successfully make the switch without the headaches.

Final thoughts

Personal services income, taxable income, tax rates, company structure, capital raising, tax incentives, growth potential – there is a lot to consider when deciding whether to transition to becoming a company.

No matter whether you’re operating as a sole trader or running a business, maximising your business income by reducing your income tax should be one of your top priorities. Being able to get the most out of your tax return by taking advantage of all the deductions and tax breaks available to you can help boost your bottom line and give your business a competitive edge.

If you are an Australian sole trader looking for the best tax help software that can help you maximise your own tax return, look no further than TaxTank. Our innovative sole trader tax platform offers a variety of features that will save you time and money, including live bank feeds, simple vehicle expense claims, and secure document storage. Unlike other business applications like Xero and MYOB, with TaxTank you’ll always know your personal income tax position and that of your business all year round so you can avoid stress at tax time. TaxTank is also a fraction of the costs from just $9 per month. Finally a software just for sole traders so don’t delay in getting your free trial. Start maximising your tax return and growing your business today with TaxTank!t


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Important Tax Deadlines

For all incomes earned between 01 July 2023 – 30 June 2024.  

Tax returns can be lodged from 01 July 2024. You can prepare early with TaxTank so you know exactly what’s going on ahead of time.

For all incomes earned between 01 July 2022 – 30 June 2023.  

Tax returns are now OVERDUE.  

You can use TaxTank to get up to date and lodge with our partner accountants.

Tax returns are OVERDUE.  

You can use TaxTank to get up to date and lodge with our partner accountants.

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