Choosing the right business structure is one of the most important decisions a business owner can make. For many Australians, starting as a sole trader is simple and cost-effective. But as a business grows, there may come a point where operating through a company becomes worth considering.
So, when should you review your business structure?
Starting Out as a Sole Trader
A sole trader structure is often attractive for people starting a small business, freelancing, contracting or testing a new business idea. It is generally straightforward to establish and can involve fewer administrative requirements than running a company.
However, being a sole trader also means your business income is generally reported through your individual tax return, and you remain personally responsible for the business’s debts and obligations.
As your revenue, assets and business activities increase, it is worth reviewing whether your original structure still suits your circumstances.
Signs It May Be Time to Review Your Structure
There is no single income level at which every business should become a company. The right decision depends on your circumstances, profitability, future plans and financial goals.
However, some common reasons to review your structure include:
- Your business profits are increasing consistently.
- You are planning to employ staff or expand operations.
- You want to reinvest profits into business growth.
- You are taking on larger contracts or greater commercial risks.
- You are acquiring significant business assets.
- You are considering bringing in a business partner.
- You want to prepare the business for future growth or sale.
These factors do not automatically mean a company is the better option. They are simply signals that it may be time to speak with an accountant about your options.
Is a Company Always Better for Tax?
Not necessarily.
A common misconception is that changing from a sole trader to a company will automatically reduce your tax. In reality, the tax outcome depends on your circumstances, how much the business earns, how profits are used, and how money is taken from the business.
There can also be additional accounting, ASIC, reporting and administration requirements associated with operating a company.
That is why business structure decisions should be based on the bigger financial picture rather than tax alone.
Don’t Forget About Asset Protection
Structure can also have implications beyond tax.
A company is a separate legal entity, which can provide a degree of separation between the business and its owners. However, asset protection is not absolute, and directors can still have personal responsibilities and liabilities in certain circumstances.
This is one reason professional advice is valuable before changing your structure.
Planning for the Next Stage of Your Business
Your business structure should support where your business is going, not just where it is today.
If you are a small business owner in Brisbane, Ballarat, Melbourne, Bendigo or the Gold Coast, reviewing your structure with an experienced accountant can help you understand the potential tax, financial and administrative consequences before making a change.
At MDS Accounting & Financial Services, our business advisory and taxation teams help business owners assess their financial position, consider business structures and plan for sustainable growth. The right structure can make it easier to manage your obligations today while preparing your business for tomorrow.
If your business has grown significantly since you started, it may be time to ask a simple question: Is your current business structure still right for you?
Speak with the MDS Accounting team to review your options and make a more informed decision about your business’s next stage.
