So you’re looking at changing your business from operating as a sole trader to being a registered company. This is an exciting for you and your business, and to make sure you get it right, here is a guide to how to change your company structure. This article will explore everything you need to know in regards to changing from a sole trader to a company.
Table of Contents
Benefits of Incorporating
- Limit your personal liability;
- Minimise tax liability (the tax rate for small businesses, at 28.5%, is less than the highest tax bracket for individuals);
- Create a better and more legitimised brand image to customers and suppliers;
- Raise significant capital for the business; and
- Carry forward losses indefinitely to offset against future profits.
Steps to Incorporate
In order to incorporate your business, you must:
- Create a separate bank account solely for use with the business;
- Create a new TFN for the company; and
- Choose a company name
- Check that no one else has the same name
If you decide not to choose a company name, your company name can be your Australian Company Number (ACN)
These steps are generally not necessary for registering a company, however may be beneficial for your business or required in certain circumstances.
Apply for an ABN
You will need to apply for an ABN in certain circumstances, including:
- To include GST in the price of sales, and to be eligible to claim GST credits;
- To claim energy grants credits; and/or
- To obtain an Australian domain name.
It might be good to have an ABN to provide more legitimacy on invoices or documents you may send to customers or suppliers as it allows them to quickly search for your company using the ABN.
Note that if you already have an ABN, it cannot be used for your company – you must apply for new one.
Register for a Business Name
You do not have to register for a business name if the business name would be the company name you have chosen. If your business name has already been registered, you can keep it; enter your business name as the company name. PTY LTD will be appended to this name, however you can have a variation in trade, such as “Proprietary Limited” or “Pty Limited”.
If you’re not ready to register your company but would like to keep a name ready to go, you can reserve a name; it will be reserved for 2 months and can be extended.
Create a Constitution
If you are going to be both the sole director and sole member (shareholder), you do not need to have any formal rules. However if there is an additional director or there are more than one member, your business must be regulated by either the replaceable rules in the Corporations Act or by a Constitution.
To make a Constitution, you will need to either:
- Draft the Constitution before registering the company and obtain written consent from each director and member; or
- Draft the Constitution after registering the company where it will come into force after a special resolution is passed by the company.
For more information you can read our guide on Company Constitution vs Corporations Act Replaceable Rules.
Update or Draft your will
If you are a sole director of your registered company and you pass away, there can be complications for the operation of your business. Without a specific provision in your will about how your company will run post-mortem, a person would need to apply to the local Supreme Court to administer the company or the Public Trustee would step in.
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Ready to Register?
All company registrations are governed by the Australian Securities and Investments Commission (ASIC). ASIC allows you to complete a company registration yourself using ASIC Form 201. However, we do not recommend it as they do not provide you with your company register documentation that you need to ensure you’re compliant.
For ease and convenience you can also choose to use a service provider such as LawPath to complete the company registration. LawPath and other service providers deal with ASIC directly and can provide additional services – for example, LawPath’s ‘Company Started Bundle’ also includes GST, PAYG, TFN and .au domain registration.
In conclusion, transitioning your business from a sole trader to a registered company presents numerous advantages, including limiting personal liability, minimising tax liability, enhancing brand image, raising capital, and carrying forward losses. To ensure a smooth transition, follow the steps outlined: establish a separate bank account, obtain a new TFN, and select a company name. Additionally, consider applying for an ABN, registering a business name, creating a constitution, and updating your will for comprehensive preparation. Utilising services like LawPath can streamline the incorporation process, ensuring compliance and peace of mind.