Your business is now stable and has started to take off – well done! You’re now on your way to selling more products and services and making more money for your company. However, you feel like you’ve done the hard yards as a sole trader, and you think it could be better to take the next step – incorporating a company.
But you are anxious because you don’t know what your business will look like after incorporating it.
What are the pros and cons?
And how do you know if you are ready for this big change?
You might be thinking, it’s only you and your partner, but the time to employ someone else has come.
Do you give them shares? How does all this even work?
You don’t need to feel overwhelmed, because the process is simple and can be compared to like trading a car or bike. In fact, this is an opportunity for your business to continue growing, but you need to consider these things:
- How much money are you currently making?
You need to know your gross business revenue, and it must be more than $75,000 before you can justify the expenses of setting up a company or incorporating. This means that you’ll need to register for an ABN and GST.
- Determine if your assets are protected, in case something goes wrong in your current structure
You’ll need to know if your personal assets are protected from the debts of the company. You’ll need to understand the larger the business grows, the larger
- If something goes wrong in your current structure, are your assets protected?
Put simply, conducting business through a company can shield you and your assets from the debts of the company, as your personal liability. The larger the business grows, the larger the risk to personal assets, and the more they need to be protected.
What Does it Mean Legally?
If you’re going to look at it from a legal point of view, when you incorporate your business into a company – legally, it’s not you. You can be a shareholder or a director, but you can’t be the company because it acts in its own name, and just like you – it can pay expenses, earn income and be sued.
What About Tax?
Usually, your company will pay taxes at the corporate rate, which is currently at 30%. However, there has been some speculations that this might drop, but there’s no definite timeline for this to happen.
So, it is essential to understand that sole traders pay taxes depending on their personal marginal rate. This is because the income you earned as a sole trader is considered assessable income, but this is not the case when you’ve already set up a company.
What are the Fees?
There are several fees that you need to know about when you’re going to incorporate a company. Basically, you’ll need to pay for an ASIC registration which costs $444 and an ASIC annual review fee for $231 per year.
But you also need to take into consideration the accounting and device costs on top of your initial fees.
How Do I Incorporate?
- Registration: The first step is to register your business name and trading name with the ASIC. However, if you’re planning to have a different trade name, then you are required to register the trading as a business name. This means you need to make sure the company has an ACN, ABN, and a TFN. You can visit asic.gov.au and ato.gov.au for more details.
- Structure: You also need to know that you can set up a company online, but you’ll need an accountant for this purpose. You also cannot have more than 50 shareholders and is restricted in the number of overall shares. You are also required to issue stock – the unit of ownership in a company. Therefore, you can initially declare 1000 shares of stock for $1 and divide it between the founders of parties investing. The names of the shareholders are commonly put on the application, the funds go into the bank account, and your company is good to go.
- Directors: Lastly, you’ll have to establish the directors because these are the key decision maker in running the business. Asset protection for the directors is where incorporating has an advantage over operating as a sole trader. Directors are also part of Ltd (Limited Company); this only means that asset risks are limited to company assets. However, this is not the case if you’re a sole trader because if you can pay the debt of your business then creditors can sue you and they have access to your personal assets like your own home.
What are the Disadvantages?
The main disadvantage of incorporating is cost and increased paperwork. Just think about it, you’ll need to take care of BAS, PAYG, track leave, pay superannuation, file tax return and allow sick leave to your employees.
A Final Word
In my opinion, incorporating will require more expense, more administration, and more attention to detail. However, it could mean asset protection, and if the company is based in Australia, it will also mean a tax rate of only 30 cents on the dollar of taxable income.
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