So, you’ve set up your business. Should you stick with a sole trader structure, or would it be better to establish a company?

As businesses mature, it’s often a good idea to consider whether the current business structure is appropriate for long term growth. Many small businesses start life as a “sole trader” (that is, owned by the business operator in their personal name) but want to graduate to a company structure when the time is right.

Setting up the company is easy – the harder part comes in transferring the business over to the new structure. There are many things to consider. The checklist over the next few pages act as guidelines on things to remember. Some are obvious, some not so much.
Ultimately, changing from being a sole trader to a company relies on planning and not forgetting the little things.

Sole Trader

As a sole trader, you are the business, and the business is you. This is the simplest and most cost-effective structure for a small business, ideal for startups and solo entrepreneurs looking for minimal setup costs and fewer compliance requirements.

  • Pros:
    • Easy and affordable to set up.
    • Complete control over business decisions.
    • Fewer compliance obligations than other structures.
    • Straightforward tax filing since business income is your personal income.
  • Cons:
    • Unlimited liability – you are personally responsible for debts and legal actions.
    • Limited growth potential if you’re planning to scale significantly.
    • Less credibility with investors, clients, and banks.

Is it for you? A sole trader structure is often the starting point for many small businesses, especially in their early stages. However, if the business grows, this structure may lack the legal and financial protection you need.

Company

A company is a legal entity separate from its owners, governed by the Corporations Act. It provides a higher level of protection against liability, making it suitable for businesses aiming for growth, external funding, or complex operations.

  • Pros:
    • Limited liability for shareholders, meaning personal assets are protected.
    • Perceived as more credible by clients, banks, and investors.
    • Better options for fundraising and scaling.
    • Tax benefits, with company tax rates often lower than individual tax rates.
  • Cons:
    • More complex and expensive to set up.
    • Heavier compliance and reporting requirements.
    • Directors have legal duties and obligations.

Is it for you? Transitioning to a company structure can benefit a growing business, especially when scaling, hiring more employees, or seeking investment. It allows you to separate personal and business assets while enhancing your business’s credibility with clients and vendors.

Switching from Sole Trader to Company? Here's what you'll need:

Finance

  • Apply for a new bank account on the company name and inform third parties
  • Set up new company in your accounting software
  • Transfer of cancel existing direct debits
  • Transfer or cancel existing subscriptions
  • Ensure outstanding creditors are paid in full and those accounts are closed
  • Ensure all customer accounts are collected in full or written off

Tax

  • Cancel ABN, GST and PAYG registration for sole trader business
  • Apply for TFN, ABN, GST and PAYG for new company
  • Enroll for Payroll tax (if necessary)
  • Ensure you maintain tax records for the old business – you’ll need these come tax time
  • If the business has fixed assets, are these transferred at the correct value? Identify tax outcomes for write off and depreciation
  • You may be liable for Capital Gains Tax on the transfer of the business. Tax law provides various exemptions and rollovers. Make sure you speak to your tax advisor about correctly documenting these changes to avoid tax risks down the track

Finance

  • Ensure your company has sufficient capital to operate effectively
  • Have a business loan? You will need to enter into a new loan agreement with your bank or financial institution. Don’t forget to pay the old loan.
  • Prepare a budget/forecast. While the operations of the business may not have changed, your cashflows and ability to draw income from the business have.

Legal

  • Transfer ownership of business name to company (unless the company uses the registered business name)
  • Assign for the business premises (or prepare new lease)
  • Set up and execute agreements with all customers and suppliers (e.g. utilities)
  • Set up new insurance policies (business insurance, public liability insurance, professional indeminity insurance, product liability insurance etc.
  • Update all documents and templates such as invoices, letterheads, email signatures to include new company details and ABN
  • Update Terms & Conditions in your documents

Assets

  • Motor vehicle registrations – transfer to the new company (if company owned). Note there are FBT consequences of a company owning vehicles.
  • Intangible assets (e.g. IP, business names, trade marks etc)
  • Domain name registration
  • Record your fixed assets in the fixed asset register. Ensure you correctly record the tax base of the assets in the new company.

Employees

  • Set up a new Workcover policy. Ensure you’re correctly registered with the relevant state authority.
  • Update employment documentation such as including employment contract, TFN declaration, superannuation details.
  • Transfer staff and leave entitlements.

Steps to Incorporate

  1. Decide whether you will set up your company on your own or have a service provider do it for you
  2. Pick a name for your company or business
  3. Create a set of rules for your company
  4. Select Your Directors and Shareholders
  5. Decide how to structure your shares
  6. Decide which state or territory you want to register your business in
  7. Select the registered office and principal place of business

Understand Your Tax Obligations

As a moving from a sole trader to a =company, you’ll have several new tax obligations to be aware of:

  • Goods and Services Tax (GST): If your company expects to have a turnover of $75,000 or more per year, you’ll need to register for GST. This tax is added to most goods and services sold in Australia.
  • Pay As You Go (PAYG) Withholding: If you have employees, you’ll need to register for PAYG withholding. This system requires you to withhold tax from your employees’ wages and remit it to the Australian Taxation Office (ATO).
  • Company Tax: All companies in Australia must pay company tax on their profits. The current company tax rate is 25% for base rate entities (companies with an aggregated turnover of less than $50 million) and 30% for all other companies.
  • Fringe Benefits Tax (FBT): If you provide certain benefits to your employees, such as a company car, you may need to register for FBT.

Set Up Your Company’s Record-Keeping and Compliance

Once your company is registered, you’ll need to set up a system for keeping accurate records. This includes financial records, minutes of meetings, and records of resolutions.

Your company is also required to keep ASIC updated with any changes to your company’s details. This includes changes to your company’s directors, shareholders, or registered office address. You can update these details online through ASIC’s portal.

Open a Company Bank Account

Opening a separate bank account for your company is essential. This will help you keep your personal and business finances separate, which is important for both legal and tax purposes.

Wwa Bannerctaimg 1

Unlock your business’s potential with expert accounting services

+61 (02) 8089 2561
CONTACT US

Ready to Start?

At JD Scott + Co, we make it easy to get started on the right foot. If you’re ready to incorporate and set your business up for long-term success, we’re here to help.

Our team will handle the paperwork, guide you through the process, and ensure everything is set up correctly so you can focus on completing the transition checklist above. For more information, get in contact with the team today!

For more information, check out our video below.