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A question I get asked a lot is “when should I set up a company structure for my business?” When answering this question, I consider both the practical and spiritual aspects of money and business.
Most people will start out their business journey as a sole trader. It’s a relatively simple business structure to set up. You register for an Australian Business Number (ABN) and you’re ready to go. There’s no cost involved in registering for an ABN, and once you’re registered, you’re able to start running your business and invoicing customers.
You may have heard of other business structures out there, such as a partnership, company or trust, but may not know whether they’re right for you, what’s involved or how to go about setting one up.
Whether you’re just starting out, or you have been in business for several years, there are four main things to consider when deciding what business structure is right for you.
The first and foremost thing to consider is the risks involved in running your business. What is the risk that you may be sued? Are you working in an industry where the service or product you offer carries an element of risk? Do you or are you expecting to hire contractors or employees? Will you be required to sign a commercial lease agreement and thus taking on a large financial risk? Your business insurance will cover certain elements of risk, but there may be some elements that will fall outside the boundaries of your insurance.
As a sole trader, you and your business are the one entity. Your business is you. So if your business happens to be sued for whatever reason, you are the one that is liable. All your personal assets such as your home or other investments, will be on the table.
So if you do own your own home or have other investments in place, you may want to consider setting up a company or trust structure to help protect your personal assets.
A company has what is called ‘limited liability’. A company is a completely separate entity to you. It has its own Tax File Number (TFN) and ABN. So if your business is sued, the liability is limited to the net assets that sit within the company structure. Your personal assets are thus protected.
A trust is also a completely separate entity to you and if the trustee is a company, it will also carry limited liability.
This is the main reason people choose to move from a sole trader to a company or trust structure. To protect your personal assets and reduce your personal risk.
As mentioned, there are no major costs involved to set up as a sole trader. It’s free to register for an ABN. When it comes time to do your tax, your sole trader income is included as part of your individual tax return.
There are higher costs involved to set up and maintain a company or trust. There’s registration costs at the initial set up and also annually. The compliance costs are significantly higher. As a company you will need to lodge a Company Tax Return, a trust will need to lodge a Trust Tax Return, and both entities need to have financial statements prepared by an accountant.
If you have employees, and this includes yourself, you will also need to have workers compensation insurance and if your wages bill goes over a certain threshold, you will have to pay payroll tax.
As a sole trader, because your sole trader income is included as part of your individual tax return, you are taxed at the individual’s marginal tax rates. If you have no other salary or investment income, this means you get the tax-free threshold of $18,200, and then tax rates from 21%, 34.5%, 39% and 47%, depending on your income.
The tax rate for a company that is considered small (where your turnover is less than $25 million) is progressively changing to 25% by 2022. A company however, does not receive a tax-free threshold. So the net profit is all taxed at the flat rate of 25%.
This means, that you can earn up to around $100,000 profit (not income) as a sole trader before you will pay the equivalent of the company tax rate of 25%. If your business is earning profit of over $100,000, you will pay less tax in a company structure. Up until that point, you will pay more tax as a company than a sole trader.
A company does have some flexibility when it comes to tax planning. You can pay yourself a wage or directors fee to help take advantage of the individual marginal tax rates and reduce the tax payable in the company.
Having outlined some really practical considerations such as the risks, costs and tax involved, I also invite you to consider a more spiritual aspect of business, and that is the energy of your business structure.
Your business structure is the foundation of your business and creates a container for your business to operate in. The energy of your business is like water. Water will fill up whatever space is available to it. If your container is small, the water will be restricted to remain in that container. If you expand the container, the water will flow and expand to fill up the space.
Although a sole trader structure has lower costs, and possibly lower tax in the earlier stages, it has limited capacity to grow. The container is small with a maximum capacity to earn $100,000 in profit, and marginal tax rates which encourage you to earn less, so that you pay less tax. The energy of a sole trader structure is thus restricted and contracted, keeping you and your business in scarcity.
A company (or trust) on the other hand, has higher costs and possibly higher tax, but has unlimited capacity to grow. The container is unrestricted and unlimited, creating a feeling of expansion. It creates a structure to allow space for your goals and evolution of your business. The energy of a company structure is thus expansive and abundant, encouraging your business to grow.
If you feel ready to create expansion and abundance in your business and would like to set up a company or trust structure, Heal.Thy Money can help you. If you have questions or require advice as to what business structure is right for you, Heal.Thy Money can also help you!