The hidden implications of moving from Sole Trader to Company Structure
So you want to move from a Sole Trader to a Company but you have quotes ranging from $500 to $3000. Why is there such a drastic variance? And what exactly are you getting for your money?
“But the first question you need to answer is ..Do you even understand why you want to change structures?”
Sure – you can change from a sole trader to a company, what seems to be overnight, but do you really understand the consequences, both now and long term? Has this been explained to you (by someone qualified and not by your friends or randoms on Facebook)?
“The simple facts are, getting a quote for any professional services should not be relied upon if you don’t understand what you are paying for. “
So here are my top 5 tips to investigate when considering changing from a Sole Trader to a Company Structure:
1. Who is providing the advice? If you don’t feel that you can ask the accountant giving you the quote what is included, well that should be the first indication that they are not the right fit for you. We are astounded by clients who come to us for advice, who were so scared and intimidated by their previous accountant they never understood why they did things or what they actually signed up to. WHAT. Really WHAT?? No No No. Company documents are legally binding documents and if you don’t understand them, don’t sign them. Your accountant should be a long term relationship, not a one night stand so choose accordingly.
2. What is included in the quote? So when you are comparing the $500 quote to the $3000 quote, what inclusions (and what exclusions) apply? Do you get the company setup with no advice and no direction, TFN application, ABN application, PAYGW registration, GST registration, do you get ongoing consulting work, a meeting, initial tax advice or ongoing tax return fees? Or is it somewhere in the middle? You simple can’t compare two quotes on price alone without knowing the details. The inclusions should all be stipulated in writing in the quote, so go through it with a fine tooth comb.
3. Do you know the ongoing costs? A sole trader is one of the most popular structures for a reason – it is the cheapest to setup and quickest to implement. But a company can have other benefits – such as asset protection, tax advantages, long term growth/investment opportunities, exit strategy, business partnerships, etc. But a company structure comes with higher ongoing costs. Considerations include the annual ASIC fees, the tax return fees for a company are much higher than a sole trader, your business memberships/registrations may double if you need to have them in both individual and company name, and you can’t take out drawings without potential loan or wage implications. When assessing the right structure, you need to consider all the implications and not get caught up in the hype without full investigation for your personal situation.
4. Cash flow implications. As a company director, you can’t take drawings at any stage you like, which is what most sole traders are used to. What you need to be aware of is the implication of your drawings being deemed wages – and with this it brings the likes of tax to pay to the ATO and superannuation to be paid on those wages each and every quarter. Sometimes these extra mandatory cash flow implications can really hit some startup company’s hard where it hurts most (the hip pocket).
5. Are you a good director? That’s right – when you become a director of a company you are bound to act in accordance with the Corporations Act. Whilst a company does provide much better asset protection than a Sole Trader, if you as a director knowingly trade whilst insolvent (ie….continue trading with zero cashola), you as a director are opening up a can of worms on yourself. Are you ready for that responsibility? If you don’t understand numbers, and have no accountant you can trust – it is time to start educating yourself and building your trusted team stat.
As an accountant, we think your structure of your business is one of the most important decisions. Sole Trader or Company, Partnership or Trust. You need to understand why you are choosing your specific option. Yes, you can change structures down the track, but the considerations above (plus many more I haven’t even had time to mention) need to be considered before jumping into bed with a company because you thought it sounded like a good thing to do.
Understand the options, understand the costs, understand the benefits – and get a bloody good accountant (ahem….hellooooo) on your team who can explain all this to you in a language you understand.
Do you understand your obligations of being a company director?