I’ve just had five clients switch from a sole trader set-up to a company, ready to start fresh from 1 July the new financial year. Helping them made me realise there is SO much to know from a bookkeeping/accounting perspective that I take as a given, but you might not know! Before we dive in, if you’re unsure what the difference is, here’s a robust checklist. Basically, as a sole trader your business liability sits with you personally – because YOU are the business, there is no seperate entity. If you switch to a company, you have different responsibilities however, and it is a seperate business.
You’d think switching from a sole trader to a company would be pretty easy from a bookkeeping perspective. Once you have a new ABN you can simply note the new one, select ‘company’ from the drop down box and off you go in your XERO file. Unfortunately not. Step awaaaay from the software!
When you move from sole trader to a company, your reporting and XERO accounts need to be separated. And I mean don’t fiddle with your current Xero, I mean need a whole new Xero file.
I’ve seen this shortcut taken before and trust me when I say, it’s a literal nightmare. Payroll issues, BAS lodgements, Profit splits, income tax and more (my head is hurting thinking about it!). If you’ve already made the switch and you haven’t separated your Xero accounts, get a BAS or Tax Agent to help you with the best course of action.
Another big red cross? Not having separate bank accounts! Unlike when you’re a sole trader – you’re actually required to have a company bank account, and company income isn’t automatically your money. You must separate those bank accounts and pay yourself a wage to take any money out, owner drawings aren’t a ‘thing’ when you set up a company.
If you do have a seperate biz bank account already as a sole trader (high five 👋 for being amazing!), sorry to break it to you, you do still need to open new bank accounts in the company name.
The Right Way To Switch To A Company
My team and I have converted five clients from sole trader to a company this new Financial Year, alone and in our opinion, this is the initial steps to get it right and keep it clean.
- Register a new ABN under your new company name with your Accountants help
- Set up new bank accounts under your company name
- Send all account details (including PayPal if you have a new one) to your trusty bookkeeper so they can upload your bank feeds into Xero
- Create a new Xero account just before you start trading so you can get it setup ready to go, and bank feeds working nicely
- Transfer your trading name to your new entity via ASIC
- Get new insurances to cover your company – this is vastly different to sole trader insurance.
- Got employees? You need them to complete new tax file declarations & employee contracts.
- And a few more things your bookkeeper can help you get under control
When To Make The Switch To A Company
My clients ask this all the time and the answer isn’t black and white. These are the top reasons my clients decide to move over to a company set-up:
- TAX! When you start earning more as a sole trader, your tax rate might go up. As a company, you *might* end up paying only 28% tax (dependant on a multitude of things) vs up to 48% as a high-income sole trader (again, dependant on a multitude of things) so make sure you get advice from a Tax Agent on your circumstances
- GROWTH! If your business has grown and you’d like to grow it further in the future, a company set-up will allow for it. And here is a great podcast from TM Solicitor on structure and growth with your long term vision.
Please keep in mind setting up a company does have more costs involved. You’ll have to pay more for things like insurance, accounting fees and more. My best advice is to work out your strategy based on your needs – don’t make these decisions lightly and make informed decisions, based on personal advice from your Tax Agent.
If you have decided to move over and need bookkeeping support, I’d love to chat to you! Feel free to book a discovery call where we can chat about your software set-up and help you to organisation and beyond!