To say that the second half of financial year 2020 was a roller coaster for business is quite the understatement. The lingering drought, catastrophic bushfires and COVID-19 pandemic combined to strike fear into even the most solid of Australian businesses. As an individual you may have lost your employed position and are starting to focus more on that hobby as an income-producing endeavour, or you may have been trading as a sole trader but are feeling a little exposed to the winds of economic change. The start of a new financial year brings with it the opportunity to address these concerns and provide you with the comfort of increased protection in company structuring.
Admittedly operating as a sole trader provides you with ultimate flexibility – there are no partners, directors or shareholders to answer to, and you free to run the business in whichever manner you choose with comparatively little regulatory compliance. However, being a sole trader exposes you to risk as you must enter into contracts as an individual and will therefore be personally liable in the event of default. Your personal assets will therefore be exposed to attack.
A simple and relatively inexpensive solution to this problem is the establishment of a company. A company is a legal entity that is separate from you as an individual; therefore, contracts that the company enters into expose the company, rather than the individual director/s and shareholder/s, to risk in the event of default or other litigation. There are exceptions to this rule, most notably where an individual director is required to be a personal guarantor to a contract. However, generally speaking, the company structure allows the functions of the business to be conducted and clearly delineated from the operation of the business. Companies are also subject to a flat rate of tax which can assist in streamlining the accounts of the business. What’s more, with the start of this financial year the company tax rate has been reduced to 26% for ‘base rate entities’ (companies with at least 20% active income that turn over less than $50 million a year), and will reduce further to 25% on 1 July 2021. Who doesn’t like a tax break to start the new year!
Companies also allow for the relatively straightforward addition and removal of partners to the business, as well as the provision of equity to valued employees. A possible investor may wish to enter into the business by providing funding; the simplest way of achieving this is by the investor being issued shares in the company that runs a business in return for their investment. Likewise, if a shareholder ever wishes to exit the business, their shareholding would need to be valued and then sold to one of the remaining shareholders.
So if you are a sole trader looking to start the new financial year with more peace of mind (and potentially more generous tax treatment), don’t hesitate to contact Rostron Carlyle Rojas Lawyers. We will be happy to guide you through the process of setting up your trading company.