Starting as a sole trader makes sense for many Australians
It’s a relatively simple structure to establish, ongoing administration is lower, and when you are working largely on your own, there may be little reason to introduce a more complex structure.
But the structure that suited the business in its early days may no longer fit as profit, staff and risk increase.
If you’re wondering when to change from sole trader to company, no single income or turnover figure answers it. The better question is whether your current structure still supports where the business is heading.
When should you review your business structure?
A restructure is worth discussing when the business looks materially different from the one you originally started.
Common triggers:
- You are employing more people and building a larger operation.
- The business is consistently generating profit above what you need to pay yourself.
- You want more flexibility around tax planning and retained profits.
- Your exposure to business liabilities has increased.
- You’re considering bringing in another owner or investor.
- You want to build a business that can operate with less reliance on you personally.
- You’re starting to think about succession or an eventual sale.
None of these automatically means a company is the right answer. They are signs it may be time to have a business accountant review your structure.
Your profit is growing beyond what you need personally
One of the most common reasons for changing from sole trader to company is a shift in profitability.
As a sole trader, the net profit from the business forms part of your individual taxable income, whether you withdraw all of the money or leave some sitting in the business.
This can work well when profits are modest, or you need most earnings to support your personal living costs. The position can change when the business begins producing consistent surplus profit that you want to retain and reinvest.
A company is a separate legal and tax entity. Eligible base rate entities may be taxed at the 25% company tax rate. This can provide more flexibility when you retain profits for working capital, equipment, staff, or future growth.
That does not mean moving to a company automatically reduces your overall tax to 25%. The owner must handle money taken from the company correctly, and salary, dividends, and other payments can have further tax consequences. The benefit is often greater flexibility around timing and retained profits, rather than a blanket tax reduction.
The business is taking on more staff & more risk
Growth usually brings greater responsibility.
A sole trader is legally responsible for the business’s debts and liabilities. As the business adds employees, larger contracts, equipment or more significant commercial commitments, personal exposure can become more important.
A company creates a separate legal entity between the business and its shareholders. This can better separate personal and business assets and liabilities.
However, incorporating does not remove every personal risk. Directors have legal duties and may still become personally liable in some circumstances, while personal guarantees can create exposure outside the company.
Asset protection should therefore be considered alongside contracts, insurance & finance arrangements.
You are building a business that can operate without you
Many sole trader businesses begin with the owner doing most of the work and making every decision. Over time, the business may add staff, systems, recurring customers & management processes.
At that point, you may no longer be building yourself a job. You may be building an asset.
A company structure can better suit a business intended to scale, bring in other owners, or eventually be sold. It can also make ownership and governance clearer as the business becomes less dependent on one person.
For a business adviser, this commercial side can matter as much as the immediate tax outcome.
When a Sole Trader Structure Stops Being The Best Fit
Consider a plumber who starts working for themselves.
In the early years, the business generates enough income to pay the owner a reasonable amount and cover vehicles, materials, insurance, and other overheads, but leaves little profit. Income can also vary from month to month.
At this stage, operating as a sole trader may be appropriate. The structure is straightforward, costs are relatively low, and introducing a company may add administration without creating a meaningful benefit.
A few years later, the plumber employs several staff, has a stronger pipeline of work, and consistently makes profit above the owner’s personal income. Some earnings can remain in the business to fund another vehicle, equipment, recruitment and working capital.
This is where a structure review becomes valuable. If the business qualifies for the lower company tax rate, retaining some profit within a company may provide a tax-timing and cash-flow advantage compared with assessing the full sole trader profit to the owner personally each year.
The important point is timing. A company may not have delivered much benefit when almost all business earnings were required personally. Once the business developed genuine retained profit and additional commercial risk, the balance changed.
Example Scenario
What are the benefits of moving from sole trader to company?
For the right business, a company structure may provide:
Greater tax planning flexibility
A company can provide more options around how profits are retained, reinvested and ultimately distributed. For a growing business, this can support longer-term tax planning and cash flow management.
Separation between the business & owner
A company is legally separate from its shareholders. This can separate personal and business liabilities, although director obligations and guarantees still need consideration.
A structure better suited to growth
A company can make it easier to formalise ownership, bring in shareholders, and build a business that relies less on the original owner.
What are the downsides of changing to a company?
A company is not automatically a better structure.
Compared with operating as a sole trader, you can expect additional establishment and ongoing compliance requirements, including:
- company registration and ASIC fees
- annual company obligations
- separate company tax returns and financial reporting
- additional bookkeeping and record-keeping
- payroll and superannuation obligations where relevant
- director responsibilities
- changes to bank accounts, contracts, registrations and insurance.
For a smaller business with limited profit, these costs can outweigh the potential benefits.
A good accountant for small business should review the numbers before recommending a restructure. The question is whether the commercial & risk benefits justify the added cost and complexity.
There can be tax consequences when you restructure
Changing structure is not simply a matter of registering a company and using a new bank account.
You may need to transfer business assets from the sole trader to the company. Depending on what you transfer, this can have capital gains tax implications. Eligible small businesses may be able to access rollover provisions for qualifying assets as part of a genuine restructure, but conditions apply.
Your business accounting services team may also need to consider GST registrations, PAYG withholding, employee arrangements, finance, vehicles, trading stock and existing agreements before the change takes effect.
Is there a set profit level indicating when I should change to a company?
No. There is no universal point where every sole trader should incorporate.
Two businesses earning the same profit may reach different conclusions because the owners have different personal income needs, risks and growth plans.
Instead of relying on a generic profit figure, your business advisory accountant should compare the likely tax position and ongoing costs under each structure. They should also consider how much profit you expect to retain and what you want the business to look like in the next few years.
Is your business ready for a structure review?
If your business has grown since you first started as a sole trader, it may be worth checking whether your current structure is still working for you. HJC’s business accountants in Geelong can review your current position, expected profits, growth plans and business risks to help you understand whether changing to a company is appropriate.
Speak with HJC about your business structure and next steps. Contact us to get started.
This article provides general information only. It doesn’t constitute tax, legal or financial advice. Review your circumstances before changing your business structure.
