Important Things to Consider When Switching from Sole Trader to Company

Finance and accounting

Your business has outgrown your sole trader structure

Many small businesses start out as sole traders. It’s quick and easy to set-up, and cheaper to run from an accounting perspective. However, there comes a time when many businesses outgrow their sole trader roots, or the business owner has new personal asset protection requirements and their accountant recommends that it’s time to upgrade to a different type of structure. Although this could take on different forms, the most common one is that of a company.

When’s the best time?

A new financial year is a great time to begin trading in a new entity. Ideally, you should make all transactions in the sole trader entity up to the 30th of June and all transactions in the company from the 1st of July onwards. If you are using accounting software, you will need to start a new, separate data file because separate legal entities need separate accounting data files. It’s a good idea to have your company incorporated before the 30th of June so that you can take your incorporation documents to the bank and establish new bank accounts. You won’t be able to open accounts without these. Then, it’s a good idea to have your accounting data file set up with invoice templates including banking details ready to go so that you can send your first invoice on the 1st of July without any delay if necessary.

Keeping things separate

It’s important that you separate the business activities of the two entities. Make sure that your customers understand that sales invoices issued from the sole trader entity should be paid into the sole trader bank account and that sales invoices issued from the company should be paid into the company bank account. If amounts are deposited into the wrong account, (which can happen despite your best intentions), entries will need to be made in both accounting data files to move the transaction to the right entity. The same logic applies to supplier bills. Make sure that they are paid out of the correct entity and bank account.

What happens to the assets owned by the sole trader?

Also be aware that any assets owned by the sole trader are not assets owned by the company, unless you transfer them. Transferring assets could incur transfer costs, as is the case for motor vehicles. Before you start paying for your fuel and running costs using your company bank account, get in touch with your accountant and ask them whether you should perhaps be paying these expenses privately and reimbursing yourself by way of a car allowance instead.

Administrative Considerations

Switching entities is a very time consuming process. There’s a lot more involved than just setting up the company and opening bank accounts. Consider that you may need to make changes to the following:

  • Transfer insurance policies, (such as business and professional indemnity)
  • Transfer or cancel direct debits
  • Transfer or create new subscriptions
  • Transfer staff, including the completion of all employment documentation a second time around, such as tax file declaration forms, superannuation choice forms and employment contracts plus the transfer of leave balances (if the company is assuming this liability)
  • Transfer your industry or professional association memberships
  • Establish registrations (relevant to some industries)
  • Change the ABN on your stationery and potentially the name as well
  • Transfer the ownership of trademarks

Put your sole trader entity to bed

Once all of the customers from your sole trader entity have paid their outstanding invoices, it can be a good idea to close your sole trader bank accounts unless you need to keep them open for some important reason. This will avoid the possibility of you accidentally using these accounts for your company expenses and it will make it impossible for your customers to pay invoices issued from your company into these sole trader bank accounts by mistake. If you have one or two expenses that your sole trader entity is still paying for -- like your accounting data file subscription, it might be worth paying these from your personal bank account. Just make sure that you’re accounting for this expense in your sole trader accounts.

Making a Decision

As you can probably tell now, the administrative load in converting from a sole trader to a company rises with the size and complexity of the organisation. So when you speak to your accountant about whether this move is right for you and also when the timing is right, it might be worth considering all of these factors in addition to the tax benefits and financial costs of switching.


Carmen Morris

Carmen Morris

Owner at On The Money Bookkeeping

I spent 12 years working as a bookkeeper/accountant for family businesses ranging from 2 - 600 employees. I began my own bookkeeping business in January 2013 specialising in Xero accounting software providing bookkeeping and add-on software solutions and we now service clients with up to 100 employees Australia wide. To sign up to my blog click here.

On The Money Bookkeeping

On The Money Bookkeeping

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Tom Radovanic

Tom Radovanic , Sales Director at SMECASH

good practical advice