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How to change from Sole Trader to Company in Australia 

Reading time: 15 mins

Changing from a sole trader to a company is a significant transition in Australia. This change impacts your business, like how much tax you pay, what your legal obligations are and how you can grow your business. It requires careful consideration and understanding.  

To change from being a sole trader to a company, you need to follow certain steps. Before converting, assess the financial implications, including set-up costs, ongoing costs, potential tax advantages and access to finance.  

In this article, we outline key items you should know when changing from a sole trader to a company in Australia

Key takeaways 

  • Sole traders enjoy autonomy in their business decisions, simplified setup processes and straightforward tax arrangements. However, they bear personal liability for the business’s debts.  
  • Establishing a company offers limited liability protection, potential tax benefits, better access to capital, and a professional business image. However, it comes with higher setup costs and increased regulatory compliance.  
  • Research your legal obligations and regulatory requirements associated with the business. Seek professional advice to ensure compliance.  
  • Consider the additional responsibilities required and how you will manage the complexities of company ownership. You should take into account the impact on your personal finances and lifestyle.  
  • Develop a strategic plan that aligns the transition with long-term business goals. You should build a support network of advisors to facilitate a smooth transition process.  
Brooke is a Senior Lawyer with Prosper Law. Brooke is admitted to the Supreme Court of Queensland and the High Court of Australia

Difference: Sole Trader vs Company

Sole trader

As a sole trader, you represent the entirety of your business. This structure is simple, with minimal paperwork and low start-up costs. However, it means you are personally responsible for all aspects of the business, including debts.  

Company 

A company is a separate legal entity, i.e. it has its own rights and obligations, independent of its owners. This structure offers tax advantages and limited liability. But requires compliance with more regulations and involves higher costs.  

Process: How to Change from Sole Trader to Company 

Step 1: Decide on your company structure 

Before registering your company, you should decide on a company structure that best suits your business needs.  

The most common company structure in Australia is the proprietary limited company. In this company structure, the liability of the shareholders to the amount unpaid on their shares. It also restricts the number of shareholders to 50 non-employee members.  

Step 2: Choose a company name

The name of your company is crucial for branding and legal identification. It must be unique and not similar to any existing company or business name registered with ASIC.  

Use ASIC’s name availability search tool to ensure your chosen name is available. Remember that a company name must end with ‘Pty Ltd’ if it’s a proprietary limited liability company.  

Step 3: Register with ASIC 

Register your company with the Australian Securities and Investments Commission (ASIC). This is mandatory.  

You can register online through the ASIC website, a registered agent, or a software provider offering ASIC services.  

You need to provide:  

  • Proposed company name  
  • Company structure  
  • Location of the principal place of business  
  • Details of the directors, secretaries, and shareholders  
  • Share structure  

Upon successful registration, you’ll receive an Australian Company Number (ACN). The ACN is a unique nine-digit number that identifies your company.  

Step 4: Apply for an Australian Business Number (ABN)

Once you have received your ACN, apply for a new Australian Business Number (ABN). Even if you had an ABN as a sole trader, your company needs its own ABN as it is a separate legal entity.  

You can apply for an ABN via the Australian Business Register (ABR) website

Step 5: Transfer of the business name (if applicable) 

You must transfer the business name to your new company if you were operating under a business name as a sole trader. This will help to maintain the connection of the business and protect your brand.  

Firstly, you must deregister the business name of your sole proprietorship. You must then register the business name under your company via the ASIC Connect portal.  

Step 6: Set up a share structure

You need to determine the share structure of your company. Decide how many shares the company will issue, what types of shares and what value they will have. You also need to determine your shareholders and their stake in the company.  

You should also consider setting up shareholder agreements at this stage. 

Step 7: Create and adopt company rules 

Your company needs a set of rules for its governance, known as a constitution. You can also adopt the replaceable rules set out in the Corporations Act 2001. When creating a constitution, it should outline the company’s operations, shareholder rights, and director responsibilities. 

Step 8: Obtaining the necessary licences and registrations

Depending on your business activity, your company may require certain licences and registrations to operate legally. These include Goods and Services Tax (GST), Pay As You Go (PAYG) withholding, and other registrations and licences. Check with the Australian Business Licence and Information Service (ABLIS) for your needs or consult a lawyer.  

Step 9: Transfer of assets and contracts

You should formally transfer assets, intellectual property and contracts from your sole trader business to your new company. Transfers may need legal papers like sale agreements to change ownership and allow the company to use assets legally. 

Step 10: Update your insurance policies 

Tell your insurance company about any changes to your business structure to make sure your insurance coverage is current. You may need to update or take out new policies to address the risks of running a company. 

Step 11: Notify Stakeholders 

Inform your clients, suppliers, employees and other stakeholders about your transformation into a company. Update your marketing materials, website and business documents to reflect your new business name and structure. 

Step 12: Set up a new bank account 

Open a new bank account in the name of your company. You should keep your company’s finances separate from your personal finances to fulfil legal and tax obligations.  

Step 13: Keep ongoing records and fulfil compliance requirements 

Companies are subject to ongoing legal obligations and reporting requirements. They need to keep accurate financial records, hold annual general meetings, submit annual reports with ASIC. As well as ensure compliance with tax reporting and payment obligations.  

Advantages of a Sole Trader

Let’s start with the advantages.

1. Simplicity and control

Operating as a sole trader is quite straightforward. You’re responsible for everything from decision making to running the day-to-day operations. This direct control means you can react quickly to changes in the market or in your business without having to consult with others.  

2. Ease of setup and lower costs

Setting up a sole trader is effortless and inexpensive. You need minimal paperwork compared to setting up a company, which saves you time and money. Plus, the ongoing administrative tasks are generally less demanding. This simplicity also extends to financial reporting and tax returns, which are less complex than with a company.  

3. Tax advantages

Sole traders report their business income as part of their personal tax return. This can bring tax benefits as you may qualify for personal tax allowances and credits. As a sole trader, you can access your business profits directly. This can be beneficial for tax reasons, especially if you have a lower income.  

4. Privacy

Sole traders enjoy a greater degree of privacy compared to companies. Regulators often mandate companies to share financial information or details about the business owner. Privacy can be valuable for sole traders who prefer to keep business affairs confidential. This also means they have a lower profile in the marketplace.  

Now let’s look at the disadvantages. 

Disadvantages of a Sole Trader

1. Unlimited liability

The biggest disadvantage is that there is no legal distinction between you and your business. If your business is struggling with debts or legal problems, your personal assets may be at risk. This can include your home, vehicle, and savings. This risk is particularly high in industries where legal disputes or debts are commonplace.  

2. Difficulties in raising capital

It can be difficult for sole traders to get money from banks or investors. They see sole traders as risky, which makes it difficult to obtain loans or investments. This can limit the growth of your business as you are mainly reliant on your own money. 

4. Perceived lack of professionalism

Some clients and suppliers may not see sole traders as professional or established companies. This perception can negatively impact your chances of winning business, especially with large companies or in certain industries.  

Carlynn is a Senior Paralegal at Prosper Law and is finishing a JD in Law in the Philippines

Advantages of a Company 

Let’s start with the advantages. 

1. Limited liability

The main advantage of a company is limited liability. Shareholders are generally only responsible for company debts up to the amount they invested in shares. So if the company gets into financial difficulties, your personal belongings are usually safe.  

However, instances can occur when a company debt can get personal. 

2. Taxation

The government taxes companies at a different rate, known as the corporate tax rate. This can be lower than the personal income tax rate paid by sole traders. Companies also have access to special tax breaks and deductions that sole traders cannot claim.  

3. Access to capital

Companies have an easier time raising money. They can sell shares to investors, borrow money more easily and have more financing options. This is crucial for the growth of the business. 

4. Professional image

Being a company can make your business appear more professional and trustworthy. This can lead to better business deals and partnerships and increase customer confidence in your company.  

Now let’s look at the disadvantages. 

Disadvantages of a Company 

1. Complexity and costs

Setting up and running a company is complicated and expensive. Various setup costs and annual fees apply, and you have to follow strict rules and do a lot of paperwork. This costs more time and money.  

2. Compliance and disclosure of information

Companies must follow many rules and make certain information publicly available, such as financial reports and management information. This means more paperwork and less privacy.  

3. Complexity of taxation

Even though companies enjoy some tax advantages, dealing with taxes is more complicated. The government taxes company profits twice. First at company level and then again when shareholders receive dividends.  

4. Loss of personal control

In a company, a group or board of directors usually make decisions, not a single person. Owners generally have limited control over how a business operates. This is not necessarily in the best interests of everyone involved.  

Summary

Company

  • Company director shares control of business decisions with other shareholders (if applicable)  
  • Company takes liability for any business debts  
  • Company tax rates capped at 27.5%  
  • No tax-free threshold  
  • Company structure operates under strict governance agreements  
  • Annual financial reporting obligations to ATO and ASIC required  
  • Company lodges a separate annual tax return  
  • The company deposits income into a company bank account and then pays the owner a wage from it 
  • No discount on Capital Gains Tax events  

Sole Trader

  • The business owner has complete control over their business  
  • Unlimited personal liability for all aspects of the business structure  
  • Operates under individual tax rates  
  • Receives the tax-free threshold of $18,200  
  • No governance plan needed  
  • No financial reporting obligations  
  • Relatively simple individual tax return lodgement each year  
  • Business owners can deposit income in a personal bank account and withdraw money at any time 
  • Discount on Capital Gains Tax events  

Recommendations 

Evaluate your goals and needs

Consider the position you want your business to be in 5 to 10 years’ time. If you’re aiming for large growth, market expansion or profit, setting up a company may fit in better with these plans. Companies can become larger and receive more funding more easily.  

Check how high the financial and legal risk is for your business. Starting a company in a high-risk industry can protect your personal assets from business debt or legal issues.  

Financial considerations 

Research costs and evaluate the potential return on investment. Take into account the setup costs, ongoing expenses, possible tax savings and any extra risks. You should consult a lawyer or a finance expert to understand all the tax aspects. Plus how these will affect your business and personal finances.  

If your business needs more money to grow than you can provide as a sole trader, converting to a company can help. Companies can sell shares or get better bank loans because they seem less risky.  

Legal and compliance obligations

Companies have to follow lots of rules and do lots of paperwork. Make sure you know what you need to do, such as filing reports and paying taxes each year. You may find it necessary to engage professionals such as accountants or company secretaries to assist with these tasks. 

Consult an experienced legal counsel to better understand impacts to your contracts, leases and other business matters. This is important to make sure everything runs smoothly.  

Personal readiness

Consider whether you’re prepared to take on more work and paperwork as a company owner. You’ll have to follow more rules, manage a board of directors and deal with more checks from the authorities.  

Strategic planning

Make a plan that shows how starting a company will help grow your business. Consider aspects such as how much money you’ll make, who your customers are and how you can become even more successful.  

Get a team of professionals, such as accountants, lawyers, and business advisors, to help you. They can give you advice, make sure you’re playing by the rules, and help you make smart business decisions.  

Allison is an experienced top-tier qualified Australian paralegal

Final considerations

Think about how starting a company will affect your life. Your role in the business may change, and you may no longer have as much control over day-to-day events. This may also affect your money planning, so make sure you’re prepared for this too.  

Frequently asked questions 

1. Is an ABN a legal requirement? 

An ABN is an 11-digit identifier unique to a business. Obtaining an ABN is a legal requirement to do business in Australia. 

It uniquely identifies your business and simplifies tasks such as tax and government filings. Obtaining an ABN is a free in Australia. The process is straightforward and involves a six-part online application on the Australian Business Register website.

Once you have obtained an ABN, it will remain valid for the lifetime of your business unless you cancel it.  

The cost of registering a company depends on the type of company you register. The ASIC website provides up-to-date fees, currently ranging from $474 to $576.

This does not include the professional fee charged by a lawyer to help with registration.  

It takes about 15 minutes to apply for a company online. 

You will need to register through the Business Registration Service, provide all documentation and pay the fee. You should then receive confirmation within two business days. 

Yes, you can change from a company back to a sole trader in Australia. To do this, you must cancel your company’s Australian Business Number (ABN) and apply for a new ABN as a sole trader. You will also need to transfer all assets and licences from your company to your sole trader.  

About the Author

Farrah Motley
Director of Prosper Law. Farrah founded Prosper online law firm in 2021. She wanted to create a better way of doing legal work and a better experience for customers of legal services.

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