Wondering if you should start a Company, or continue as a sole trader?
You are not alone.
"Should I start up a company?" seems to be a common question amongst small business owners, especially in their start up phase.
There are a lot of things to consider when starting a business and cashflow, compliance and liability are only a few of them.
In a nutshell we are going to list a few pro's and con's between trading your business as a sole trader, or starting up a Company (otherwise known as a Pty Ltd)
But before we even do this, you need to also consider the software that you are going to use for both operations and accounting.
You may be brilliant at doing what you do best, but the backend shouldn't be left until the end.
Knowing how you are going to invoice your clients, what your trading terms are, and how you are going to collect and manage your receipts and payments are just as important as taking that first phone call.
We can help set up your Xero Accounting software or even your scheduling software, like Service M8.
PRO's of Trading under a Company
- Generally (with exception) the financial liability remains with the company rather than on you, as an individual.
- The Company's tax rate is a flat 25% (accurate in October 2022), which is much lower that the individual tax rate of 32.5% (after your taxable income reaches $45,000)(accurate in October 2022)
- The distribution of profits to shareholders is more flexible in a company.
CON's of Trading under a Company
- The Company is a separate legal entity to yourself, so even though you may be the sole shareholder, or sole director, you still need to pay yourself a wage, directors fees or dividends in order to use the profits from the Company. You cannot just live off a loan from the company indefinitely. (and you may also be subject to Div 7A).
- Paying Wages (even to yourself) becomes admin intensive as you need to set up your accounting software for single touch payroll and ensure that you meet your SGC (Superannuation) obligations each quarter. How to do a quick payrun in Xero
- The Company has to be registered with Asic, and renewed each year, which is an additional annual compliance cost.
For more information on whether setting up a company is right for your business and for assistance in doing so, please reach out.
This articles intention is to inform rather than advise and is based on legislation at the time. Each Taxpayer’s circumstances vary so we strongly recommend that you discuss this information with your Tax Agent, Accountant or Bas Agent before implementation. If you take, or do not take action as a result of reading this article, we accept no responsibility for any financial loss incurred. This is general advice only.
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