Starting out as a sole trader is often the simplest option for a tradie.
Whether you’re an electrician, plumber, specialised builder, contractor, HVAC technician or refrigeration technician, operating as a sole trader can be a straightforward way to get your business off the ground.
But what happens when the business starts growing?
You might be taking on bigger jobs, hiring apprentices and employees or engaging subbies, buying more equipment or making significantly more profit. At some point, you may start wondering:
“Should I stay a sole trader or set up a company?”
There isn’t a specific income or turnover figure that means you have to switch. Instead, the right time to consider changing your structure depends on your business, your risks, how you use your profits and where you want to take the business.
Sole Trader vs Company: What’s the Difference?
The biggest difference is that a sole trader is not legally separate from you, while a company is a separate legal entity.
As a sole trader, you are personally responsible for the business’s debts and losses. Your business income is generally reported in your individual tax return.
A company, on the other hand, has its own tax and reporting obligations. It can own assets and earn income in its own right, and the company generally pays tax on its taxable income.
A company also comes with more administration, reporting and ongoing costs than operating as a sole trader.
When Should a Tradie Consider Switching to a Company?
There is no automatic rule that says you need to become a company once your business reaches a particular turnover or profit.
However, there are several situations where it may be worth reviewing your structure.
1. Your business is becoming consistently more profitable
If your trade business is making significantly more profit than you need to take out personally, it may be worth considering whether your current structure is still appropriate.
For example, you may want to leave some profits in the business to:
- Buy equipment
- Purchase vehicles
- Hire employees
- Take on larger projects
- Expand into new areas
A company can provide a structure where profits can remain in the company for business purposes.
However, be careful of assuming that a company automatically means less tax. Companies and individuals are taxed differently, and the overall tax outcome depends on your circumstances and what happens to the company’s profits.
2. You’re taking on bigger projects and more business risk
This can be particularly relevant to specialised builders, contractors, electricians and plumbers.
As your business grows, you may be entering larger contracts, employing people, purchasing expensive equipment or taking on projects with greater financial and commercial risk.
A company is a separate legal entity and can provide a degree of separation between the company’s liabilities and your personal assets.
However, this protection isn’t absolute. Directors can still have personal liabilities in certain circumstances, including for some company tax and superannuation obligations.
3. You’re growing your team
A sole trader can employ workers, so hiring your first employee doesn’t automatically mean you need a company.
But if you’re moving from working by yourself to running a larger operation, it can be a good time to review your business structure.
You may now have employees, subcontractors, larger contracts, vehicles and equipment to manage. Your accounting and legal obligations are likely to be more complex as the business grows.
4. You want to bring someone else into the business
A sole trader structure is designed around one individual owning the business.
If you’re considering bringing in a business partner, investor or another owner, you’ll need to review whether your current structure is still appropriate.
A company can have shareholders and may provide a structure for multiple owners.
5. You’re planning for long-term growth
Perhaps you’ve gone from working out of your ute to running a team of five or ten people.
If you’re building a business that you eventually want to sell, transfer or expand, your business structure should form part of that long-term planning.
You don’t need to wait until you’re ready to sell the business before reviewing your structure.
Does Becoming a Company Automatically Reduce Your Tax?
No.
This is one of the biggest misconceptions about switching from a sole trader to a company.
As a sole trader, your business income is generally included in your individual tax return and taxed at individual tax rates.
A company is a separate taxpayer and generally lodges its own company tax return.
While a company may have a different tax rate from an individual, that doesn’t mean you automatically pay less tax by becoming a company.
For example, if you take money out of your company for personal purposes, there can be additional tax considerations. Company profits and money you personally receive from the company need to be considered as part of the overall tax picture.
The right question isn’t “Will a company reduce my tax?” It’s “Which structure is most appropriate for my business and circumstances?”
As a sole trader, you may also have GST and reporting obligations depending on your circumstances. Find out when sole traders need to lodge a BAS and when you may need to register for GST.
What Are the Downsides of Becoming a Company?
A company can offer advantages, but it also comes with additional responsibilities.
Compared with a sole trader, a company generally involves:
- More administration
- Higher setup and ongoing costs
- ASIC obligations
- Separate company records
- A separate company tax return
- Additional legal responsibilities for directors
- More formal processes for dealing with company money and assets
That’s why switching to a company isn’t something you should do simply because another tradie told you it’s “better”.
What Happens When You Change From Sole Trader to Company?
Changing your structure isn’t simply a matter of changing your business name.
You’ll generally need to establish the new company, obtain the appropriate registrations and transfer relevant business assets, licences and arrangements to the company.
Importantly, you can’t transfer your sole trader ABN to the new company. The company will generally need its own ABN, and you’ll need to cancel the sole trader ABN when appropriate.
The change can also have tax consequences, particularly if you’re transferring assets or other business interests to the new entity.
That’s why it’s worth getting advice before making the switch.
Thinking About Switching From Sole Trader to Company?
If you’re a tradie and your business has grown, it may be time to review whether your current structure still makes sense.
Staying compliant is also important. If you have BAS lodgment obligations, missing a deadline can result in penalties. Find out how much BAS late lodgment penalties can cost.
At Chan & Naylor, we can look at your business’s profit, tax position, assets, risks and growth plans and help you understand the potential implications of changing from a sole trader to a company.
Before you register a company, get advice on whether the change is actually right for your business.
Speak with our Sydney accounting team about your business structure.
About Chan & Naylor
Since 1990, Chan & Naylor has partnered with business owners and property investors in managing their taxes and building a tax-effective wealth. Choosing Chan & Naylor means you’re not just selecting a service provider; you’re gaining a partner aligned with your financial goals. You’ll have access to a dedicated client manager supported by a team of accountants that specialises in business and property tax.
Disclaimer
This article serves as general information only and may not account for the unique circumstances of individual readers. For personalised and strategic solutions tailored to your specific situation, we invite you to seek professional advice from Chan & Naylor. Our highly experienced team is dedicated to helping you navigate the complexities of Australian taxation, ensuring that your financial strategies align with the latest regulations. Contact us today to embark on a path of informed and customised tax planning for your property investments.
