When should you move from sole trader to a company?

At some point in the life of your business, it will benefit you to move from being a sole trader to a company setup. Ben Fletcher explains what to consider before making the move.

1. Tax

People assume that by operating via a company structure they’ll pay less tax than continuing as a sole trader. This assumption comes about because the current small business company tax rate is 28.5% (previously 30%) whereas a sole trader pays the standard individual marginal tax rates which can go as high as 49%.

Where this line of thought falls over is that when you’re operating as a company, but there’s only one of you in the company (with maybe a little admin help) it’s possible the income you’re earning will be considered Personal Services Income, in which case the ATO will want to see all the profits from your business passed through as a wage to you. This means the net outcome is no different to when you were a sole trader, more or less.

However, if your business has multiple people carrying out the same work as you (i.e. billable work and not admin work), or you’re in the business of selling goods rather than services, then it’s likely you won’t be affected by this rule and you can retain excess profits in the company to be used for working capital and taxed at the company rate.

Read more at http://www.flyingsolo.com.au/finance/sole-trader-or-company-business-structure