Moving from sole trader to company

Why change your business structure?

Before diving into the steps, it's important to consider whether a company structure is the right move for your business.

Here are some key reasons why you might consider making the switch:

Your revenue has outgrown your current structure

As your business grows, higher turnover may trigger different tax rules and liabilities. For instance, an increase in profits might push your business into a higher tax bracket, particularly as a sole trader, resulting in being subjected to higher income tax rates. In contrast, companies have a flat tax rate of 25% *(for business with aggregated turnover below $50 million) which, depending on the size of your business, may result in lower taxes. 

More substantial financial transactions could also attract scrutiny from regulatory bodies such as the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO). Expanding your workforce could trigger payroll tax obligations, while higher profits might necessitate quarterly, rather than annual tax filings.

Understanding these potential changes and planning for them can help you avoid unexpected tax liabilities and ensure compliance with the latest regulations.

You may consider consulting with a tax professional to stay informed about how tax laws, current and evolving, might impact your business.

You’re exposed to more risk

Larger contracts or projects can expose you to greater liability risks. A proprietary limited company structure may offer better protection for your personal assets. For example, sole traders have unlimited personal liability, meaning that their personal assets may be at risk if facing business debts or legal issues. Conversely, proprietary limited companies provide limited liability, shielding owners from personal responsibility for company debts. 

You want more flexibility around tax and growth

A company structure offers greater flexibility for tax planning and business expansion, enabling you to benefit from various tax rates and investment opportunities. For example, leveraging corporate tax advantages can lead to significant savings, while accessing diverse investment options can drive sustainable growth.

Learn more about business structure selection. 

How to transition from sole trader to company

Transitioning from a sole trader to a company involves several steps. Here's a guide to help you through the process.

1. Decide on the right company structure

Choosing the right company structure is crucial. Consider factors such as the number of shareholders, the level of control you want to maintain and the tax implications.

Choose a private company structure (for example, Pty Ltd) if you want limited liability and control over ownership.

Key consideration: Think about future growth – will you need external investors or partners?

Read our helpful article: Sole trader vs. company: choosing the right business structure.

2. Register your company name and ABN

You’ll need to register your company name and obtain a new Australian Business Number (ABN) for your company. Unfortunately, you cannot simply change your existing ABN from a sole trader to a company.

Use ASIC’s portal to register, opens in new window.

Key consideration: Ensure your company name aligns with your brand identity. If your current business name is registered under your sole trader ABN, you'll need to transfer it to the new company ABN.

3. Appoint directors and allocate shares

Appoint directors for your company and allocate shares to the shareholders. This step is essential for establishing the ownership and management structure of your company.

Key consideration: Even if you’re the only shareholder, you may consider drafting a basic shareholder agreement, opens in new window  for future-proofing – for example, if you bring in investors later.

4. Open a company bank account

To operate under a company structure, you will need to open a separate bank account under your company name. Alternatively, you may convert your existing business account, however, there may be risks and restrictions in doing so. For example, you may lose all your historical transactions which might impact your tax reporting. It’s best to speak to your banker to decide on the best option for you.

Given that you are required to open a separate bank account under your company name, it’s good to know there are plenty of benefits of doing so. These include:

• Clear financial separation: Keeping personal and business finances separate helps to avoid confusion and ensures that all business transactions are easily tracked and accounted for.
• Professionalism: Using a business bank account can enhance the professional image of your company, as clients and customers can make payments to a business account rather than a personal one.
• Simplified tax reporting: A dedicated business bank account can help streamline the process of preparing and filing taxes, as it provides a clear and organised record of all business-related income and expenses.
• Improved cash flow management: With a business bank account, you can effectively monitor and manage cash flow, making it easier to plan for future expenses and investments.

Key consideration: You are required to transfer all business-related funds from your personal account to the company account.

5. Transfer business assets and contracts

Transfer any business assets such as equipment or vehicles, for example, and any contracts from your sole trader entity to your new company. This may involve updating agreements with suppliers and customers.

Key consideration: 

• Notify clients and suppliers about the change and update contracts accordingly.
• Talk to a tax professional about the transfer of the assets as it may trigger tax (including availability of rollover relief) and stamp duty liabilities.

Practical tip: Consider using a simple assignment agreement to transfer any intellectual property, like trademarks or branding, across to the company. You may also consider licensing the property, trademarks and branding to the company.

6. Set up financial systems

Implement financial systems to manage your company's finances, including accounting software and payroll systems. For example, you may set up bank feeds to accounting software.

7. Update insurance policies

Review and update your insurance policies to ensure they cover your new company structure. When transitioning from a sole trader to a company structure, it is crucial to update your insurance policies to reflect the new business entity.

Here are some key insurance policies that may require updating:

• Public liability insurance: As a company, you may need to increase your coverage to account for a larger scope of operations and potential risks.
• Professional indemnity insurance: Updating this policy ensures that your company is protected against claims of negligence or errors in professional services.
• Workers' compensation insurance: If you hire employees, this insurance is mandatory to cover any work-related injuries or illnesses.
• Business insurance: This comprehensive policy may need adjustments to cover new assets, equipment and the broader range of services or products offered by your company.

To update your insurance policies, follow these steps:

• Review existing policies: Examine your current insurance policies to understand the coverage and any limitations. Note any changes needed to reflect your new business structure.
• Consult with your insurance provider: Contact your insurance provider to discuss the changes in your business structure. They can guide you on the necessary adjustments and any additional coverage required.
• Update your policies: Once you have selected the appropriate coverage, work with your insurance provider to update your policies and ensure all necessary adjustments are made.
• Do regular reviews: Regularly review your insurance policies to ensure they continue to meet the needs of your business as it grows and evolves.

By keeping your insurance policies up-to-date, you can ensure that your company is protected against potential risks and liabilities, allowing you to focus on growing your business.

Key consideration: Some policies may require reapplication under the new structure.

8. Understand tax obligations

Familiarise yourself with the tax obligations of a company, including company tax rates, GST and PAYG withholding.

Action point: Register for corporate tax and GST (if applicable), opens in new window.

Key consideration: Learn how corporate tax rates differ from personal income tax rates.

Practical tip: Work with an accountant to optimise deductions during the transition year.

9. Keep stakeholders informed

Ensuring a smooth transition when updating your business structure requires clear and effective communication with all stakeholders, customers and suppliers. Here are some steps to help you navigate this process:

• Develop a communication plan: Outline the key points that need to be communicated, the timeline for sharing information and the channels you will use. Make sure the plan addresses the concerns of each stakeholder group.
• Update customers: Use newsletters, emails or your company website to inform customers about the changes. Emphasise the positive aspects and how these updates will enhance your ability to serve them better. Provide a contact point for any queries.
• Notify suppliers: Communicate directly with your suppliers through meetings or written communication. Explain how the changes may affect your business relationship and any adjustments they need to be aware of. Maintain transparency to build trust.
• Provide training: If the changes require new procedures or knowledge, arrange training sessions for relevant stakeholders. This will help them adapt smoothly and continue performing their tasks efficiently.
• Monitor feedback: After communicating the changes, actively seek and monitor feedback from all stakeholders. Address any issues promptly and make adjustments as necessary to ensure everyone is on board.

By following these steps, you can assist in making the transition is as smooth as possible, minimising disruptions and maintaining strong relationships with all stakeholders.

Key consideration: Reassure your stakeholders that services will remain unchanged.

10. Stay compliant with ASIC and ATO

Ensure your company complies with the requirements of the Australian Securities and Investments Commission (ASIC), opens in new window and the Australian Taxation Office (ATO), opens in new window.

File annual returns with ASIC and ensure regular tax reporting to the ATO.

Key consideration: Maintain accurate records of financial transactions and company decisions.

Common questions when moving from a sole trader to a company structure