Most people that start a business, usually register an ABN and start trading as a sole trader.
And why not? It’s cheap, doesn’t require any extensive tax work, and is a great way to get started immediately.
But eventually, if you are going well, there comes a time that being a sole trader just won’t cut it any more. And knowing when that time is can be a bit challenging. If you leave it too long, you can end up paying way too much tax. If you do it too early, you can also end up paying more tax than you need to (plus you’ll pay more in accounting fees).
So when is the right time?
Well, the cop out answer is there is no general answer - it’s all based around your personal circumstances. Sometimes you can use tax as the driver. Other times, it makes better business sense to do it earlier.
What we can do is show you 6 different scenarios that could mean it’s time to chat to your accountant about setting up a company.
Scenario 1: You’re crushing it.
Okay, so you’re making more money. Awesome. GST registered. Awesome. Cracking $100k in taxable income.....
Oh, hang on.
See, there’s a point where the tax you’d pay as a company would be less than what you’d pay as a sole trader (at the time of writing, it’s around $107k). So if you’re making over $100k, book a chat with your accountant.
Scenario 2: You’re taking on bigger projects (and bigger risks)
While operating as a sole trader is awesome, if something goes wrong - it’s all on you. Putting it simply, if you get sued and lose - you could lose your house.
Okay, so maybe that’s a big call. But it does happen!
And one way to protect yourself is to set up a separate entity for your business. Of course, this is another area where it’s best to get advice from a tax specialist. Like us cough cough
So if you’re taking on bigger projects and risks, book a chat with an accountant.
Scenario 3: You’re taking on workers.
While there’s no rule saying sole traders cant employ people, it does get kinda intense from a “compliance” standpoint.
There are plenty of ways you can get stung with the rules, and (going back to scenario 2) being a sole trader leaves you wide open to getting hit personally.
So if you’re starting to hire, maybe have a quick chat to your accountant to make sure you’re protected.
Scenario 4: You want to bring on a partner.
This one is simple.
You're a sole trader. Sole = solo. No partners allowed. If you want a partner, you could look at setting up a partnership, company, or even a trust.
Definitely talk to your accountant!
Scenario 5: The contract asks for company details.
When you start working with bigger companies (whether the project is big or not), you might encounter situations where they’ll ask for your company details.
Sometimes you can get around it and they’re happy enough with just your ABN.
Sometimes, they’re not, and you’ll need to set up a company if you want to work with them.
Scenario 6: You miss out on work because they’ve gone with “a bigger company”
Now, you and I both know that company or sole trader - doesn’t make a difference to the quality of your work.
You’re either good, or you’re not. But when someone is looking to hire a supplier and there’s a massive amount of choice, who do they choose?
Let’s take price out of it (that’s a whole new discussion). If all else is equal, they’re probably going to pick the people who seem more established, or bigger, or more trust worthy. As much as you might do the same job, or even better, than the other guys - you can miss out on the work because sole traders are perceived to be smaller.
So what now?
Okay, maybe you’ve decided setting up a company is a good idea.
Awesome. You could look into setting up a company on your own, but honestly, there are many ways you can get the registration wrong. And the problem with getting it wrong? Changes can get expensive.
You don’t need to use us (we’d love it if you did though), but try get to your accountant to get your company set up.
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