When first setting up your small business, you may have started out as a sole trader, but if the global pandemic has seen your small ‘mum and pop’ backyard business booming, you may be thinking about a change in business structure to a company or a trust.
Changing business structures may not be straightforward, but don’t let that put you off. With the advice from a skilled taxation accountant with experience in the corporate sector, they will be able to advise you on the pros and cons of the different business structures available and the one that best suits your situations. Mistakes can be expensive, so be sure to seek expert advice before you proceed with any changes.
The majority of small businesses are registered as sole traders. As a sole trader, register for an ABN and use your individual tax file number when filing your income tax. Depending on your income, you may be required to submit PAYG installments throughout the year. It is the easiest way to structure a business, but it does mean that all the responsibility falls upon your shoulders. Sole traders are allowed to take on employees, but there are strict tax guidelines with what you can claim. Any debts, financial loss or money that you draw as wages are unable to be claimed as deductions.
Sole traders are taxed the same as the individual tax rate—slightly higher if the business is not your main source of income—but may be entitled to claim for a tax offset, exclusively for small businesses.
If business is booming during the pandemic and you’ve had to take on employees, it may be time to switch your business to a company structure. One of the benefits of a company structure is it may entitle you to pay a lower tax rate compared to the individual tax rate. There are also other benefits, such as the potential for asset protection and concessions designed for business owners. There are some disadvantages of opting for a business structure. The set-up process is complex and can be more time-consuming with extra reporting guidelines that need to be met.
New company owners tend to make a few common mistakes when starting out, which include income reporting errors and accessing business bank accounts for personal use. As a sole trader who has recently moved to a company structure, it’s important to realise you simply can’t help yourself to money when you feel like it unless it’s to pay company bills or distribute authorised wages. Directors and shareholders may also be subject to Fringe Benefit Tax if the company assets are used incorrectly.