A common question I get asked is when should I move from sole trader to Pty. Ltd. company.
What are the reasons why I shouldn't move and how could it benefit me.
So first thing's first, is a sole trader business is actually quite
simple and quite cheap to run and do the reporting and accounting and tax work for.
Normally it could cost you anywhere between $200 to $500 a year maybe
a bit more if you want to outsource all the accounting work in tax work.
When you set up a Pty. Ltd. company, it gets quite expensive. You had to prepare
a tax return in the company, you have to prepare business activity statements
in the company as well as you've got to pay yourself, do payroll as well as do
wages and pay your own superannuation as well as do your own personal tax return.
And don't forget you also have to pay a registration fee and set up
fee of the Pty. Ltd. company. So the cost can go from $300 to $500 for
sole trader all the way to $3,000 to $4,000 for Pty. Ltd. company.
You've got a outweigh the cost and outweigh the benefits.
So a sole trader gets taxed at anywhere between 0% all the way to 45% and normally
when you start making around $100k to $120k in profits a year in your
sole trader business or in taxable income, you're generally taxed at 37% tax bracket
so you'll be paying 37¢ in the dollar of the income that you make over $90k.
For a Pty. Ltd. company, it's only at 27.5%. So there's a big difference.
So a company is at 27.5% whereas your personal name is at 37% if you're earning over $100k a year.
It's quite beneficial right? Because you're actually saving 10%?
But the thing is it does cost quite a fair bit. Generally, rule of thumb when I told my clients
is that if you don't make over $120,000 in your business don't bother looking at it
because the benefit in tax purposes and cost savings it's not that much at all.
But you shouldn't just be looking at the cost savings and tax savings when moving
to a Pty. Ltd. company. There are a lot of factors so you should be looking at.
So one thing that you should be looking at is asset protection. So moving to a Pty. Ltd.
company it's a separate legal entity, your assets that's separated from your business,
it's not your personal name that's on the business it's the company name separately.
So that's a good thing because then if something were to go wrong in your business,
it doesn't affect your personal assets and liabilities or less likely affect
your personal assets and liabilities.
And then you're going to look at your personal situation and are you risk-averse because if
you are then possibly it would be a good idea to set up a Pty. Ltd. company because you don't
want that to affect your personal assets and liabilities and personal situation.
The last thing you need to look at as well is some customers and some major
companies would prefer to deal with only a Pty. Ltd. company.
There is no employee issues, there's no minimum wages, there's no tax issues when it comes to that stuff.
So that's why they prefer to deal with the company to company and obviously company-company,
there's a brand, there's agreement in place, it's more professional.
So that's another reason why you need to move to a Pty. Ltd. company.
So you gotta ask yourself do your customers actually mind if you are not a Pty. Ltd. company.
So if you're thinking of moving to a Pty. Ltd. company it's best to speak
to your accountant but definitely look at asset protection purposes, definitely look
at your tax savings and cost-benefit and cost involved in setting up the company and running
a company and also look at the business risk and how risk-averse are you in your business.