It is important to know that you are not locked into one business structure for the life of your business. As your business grows and changes, you may decide to move to a different type of business structure.
Expanding to a company
A business structure is often the first thing to change when your business grows, particularly if you start as a sole trader and then want to register as a company.
Before you decide to expand to a company, it is important to seek professional advice so that you are aware of the differences in tax, legal and compliance obligations.
If you choose to expand your business to a company, there are some liability differences you need to be aware of concerning personal assets, debt, insurance, bank accounts, duties and responsibilities, record keeping and employing staff.
Find out more about liability differences.
There are tax differences between a sole trader and a company that you should consider such as:
- the tax-free threshold
- tax rates for income
- small business concessions
- the type of tax return to lodge
- the business taxes and superannuation to pay and report
- good and services tax (GST)
- payroll tax
Find out more about tax differences.
Managing your finances
There are differences in the way you manage your money once you move from a sole trader to a company structure.
As a sole trader, you can take money out of the business bank account as ‘personal drawings’. Amounts taken from the business form part of your taxable income and must be declared. A separate business bank account is not compulsory or a legal requirement, but it’s recommended so you can keep track of your business finances. You may choose to use an existing bank account in your personal name for your business.
As a company director, the company may pay you a salary, wages or director's fees, but you cannot simply withdraw money as ‘personal drawings’ from the company funds and use them for personal expenses—company funds must be used for appropriate company purposes. Even if you own the company (as a shareholder), the money a company earns belongs to the company.
Anything you receive from the company as an individual (for example, because you are employed as a director and being paid wages, or because you have received dividends as an individual shareholder) must be shown on your individual tax return.
As companies exist as a separate legal entity, they must have a separate bank account for the business. The company will be liable for bank fees, depending on the type of account it opens. Signatories are required for the bank account and must be over the age of 18.
Keeping financial records
Record keeping is a legal requirement and for tax purposes, you must keep records for at least five years.
As a sole trader, you can decide whether to keep electronic or paper copies of your records, but it is recommended you store these in a safe and secure location and have a back-up of your records. Records have to be in English, or in a form that can easily be converted.
As a company director, you are required to ensure that the company keeps certain financial records to comply with the requirements of the Corporations Act 2001. Financial records for companies must be kept for a minimum of seven years.
The Act states the company must keep written financial records that:
- record and explain its transactions and financial position and performance
- enable true and fair financial statements to be prepared and audited.
Under the Corporations Act 2001, there are a variety of legal obligations and duties imposed on the company and on the directors as individuals.
Some of the most important obligations for directors include the duty to:
- act in good faith
- act in the best interests of the company
- exercise care and diligence
- prevent the company trading while insolvent, (when it is unable to pay its debts)
- report to the liquidator on the affairs of the company if the company is being wound up
- help the liquidator (e.g. by giving the liquidator the company books and records that the director may have in his/her possession).
Tips for changing business structures
If you decide to expand your business to a company, here are five important steps to follow: