How to know it’s time to stop being a Sole Trader | Foundd Legal

How to know it’s time to stop being a Sole Trader

Before we deep dive into the ins and outs of it, let’s quickly cover the basics of different business structures.  If you’re unsure of these and would like a bit more information, make sure you check out our FREE business start-up checklist.

Sole Trader: a sole trader business is one that is set up under the owners’ name.  A sole trader has an ABN but the business declares its income for taxing through its owners’ personal tax return.  A sole trader business owner, has unlimited liability for the debts of the business.

Partnership: a partnership is similar to a sole trader, except there are a number of owners all in it together.  Because there are so many owners, partnerships will also require a TFN instead of being entered into personal tax returns.  Similarly to a sole trader, Partnership owners have unlimited liability.

Company: it’s easy to slip into the false mental image of a company being reserved for businesses like Coca-Cola and Apple.  But that’s actually not quite true.  There are two types of companies, private and public and each of those pretty much do what they say on the tin - private companies get to be picky with who they let be a shareholder (which is the company name for owners) whereas public companies are available for anyone to purchase shares in.  Companies are most expensive to set up and require more administrative work, however, they do allow owners to have limited liability.

In this article, we’re going to look at the indicators that it might be the right time to transfer from a sole trader business structure to a company business structure.

You’ve got other people who now also want it

I mean of course they do! You’ve got yourself a kick ass business and damn straight they want in!  If you’ve got some more people who are looking to invest in the business, then it might be time to transition to a company.

When you have a company, it is easier to set out the rules about each person’s involvement in the business, and set out who has the power to do what.  For example, if you’re bringing a silent investor on board (so someone who gives you money but doesn’t tell you what to do in the day to day running of the business) then you can easily make this happen in a company, they can be a shareholder but not a director.  If you were to remain as a sole trader and move to a partnership, then you’re less able to make sure that silence partner sticks to the silent part of the deal.

If you want to chat to us about shareholders agreements or how you can structure your company with different roles for everyone, we highly recommend booking in for a thirty minute strategy session with a Foundd Legal Lawyer, you can book your appointment here.

Bigger contracts or you’ve got big growth plans coming up

First of all, congratulations - that sounds so incredibly exciting! Secondly, though (and we hate to be the debby-downer-reality-check-lawyers, except really that’s why you love us!) it’s important to remember the bigger the contract, the bigger your potential liability flowing from it if you fail to meet your obligations under it.  

We’ve got two hints for you here, firstly, make sure you’ve got a good contract in place that will reduce your liability as far as possible and sets out very clearly the options for when this might happen. *clears throat obnoxiously loudly* - we can help you out here. Secondly, as a Sole Trader, you have unlimited liability, personally, for this if this happens.  So if your business account isn’t able to cover this, then you might have to start looking to do scary and sad things like selling your personal property to cover the debts.  In a company, though, your personal assets are far more protected, and only the business’s assets can be used to recover debts.

Taking in employees

Oh look at you go - got that business booming and are starting to need some people to come on and lighten the load?  Now that you’re an employer, remember that you will now have to insure for workers compensation.  While workers’ compensation insurance will hopefully do the brunt work for you if one of your workers is injured at work, your employees may also be able to seek damages from the business directly (outside of the insurance) if the business, or the employment structures etc caused the injury.

I’m sure you vibing what we’re about to remind you about, but I’ll say it anyway - unlimited liability.  In order to protect the personal assets you hold (and that frankly you worked so damn hard for), then moving towards a company structure will limit this liability if something happens to one of your employees.

You’re Empire’s starting to make big dollar-dollar bills

So here’s a fun fact - companies and people are taxed differently (reminder - sole trader businesses are taxed through the owner’s personal tax return so are taxed at people rates).  Up to a certain earnings point (depending entirely on your personal circumstances), then it may be preferable to be taxed as a sole trader as the tax will be less than if you were operating as a company.  Once you pass that point though (again this point will be different for everyone depending on their own situations) then it will likely become cheaper to pay tax as a company.

As we’ve (barely, and ever so gently) said, this depends entirely on your personal circumstances so it’s probably worth chatting to your trusty accountant to see which structure is better for you tax-wise.

If you’re wanting to know more or want to get an idea of what might be the right move for your business, or even just chat it through with someone who knows the ins and outs of this decision, booking in a strategy session with us!

 

***Disclaimer. Please read!!***  

  

This article is for general information purposes only and should be used solely as general guidance. It does not and is not intended to represent legal advice or other professional advice. 

 

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