Sole trader looking to grow
I run a small freelance business alongside my regular job. I'm looking at expanding and taking on sub-contractors. What's the best way to do this - start a company or remain as a sole trader?
When choosing a business structure there a number of factors to consider including commercial needs, risk, cost and tax. From the information given I assume you are currently operating as a sole trader. A sole trader structure is simple but it comes with liability risks in that your personal assets are exposed to trading risks arising from the business.
If you are planning to expand and take on contractors then the risks will increase making it more important to ensure your personal assets are protected. A company structure is an ideal structure for most small businesses and provides stronger asset protection than operating under a sole trader structure.
All small private companies need at least one director and a shareholder, which in this case would probably be you. All companies are administered by the Australian Securities and Investment Commission (ASIC) and information about how companies work and the roles of directors and shareholders can be found on the ASIC website (www.asic.gov.au).
What steps do I take?
Setting up a company is relatively simple. Your accountant should be able to do this for you, as well as provide advice on how to operate the company and what your ongoing obligations are. Alternatively you can apply to ASIC and set the company up yourself. The company would then operate the business and hire the contractors. We suggest that you talk to an accountant about how to transfer your existing business to a company and what the resulting tax implications may be.
What are the tax implications?
If you set up a company you will be required to a lodge an annual tax return for the company and pay any tax applicable at the company tax rate of 30 per cent. The amounts you pay to the sub-contractors will generally be tax deductible.
Do I then become an employer, and need WorkSafe insurance, etc?
There are a number of employment taxes and costs that might apply to the payments you make to the contractors, if the contractors you are hiring are deemed to be employees. For example, you may be required to withhold PAYG from what you pay them if the tax office considers that the contractors are really employees. You may also be required to pay superannuation and Work Cover on what you pay them. Further explanation about contractors can be found on our website by clicking here or on the tax office website.