A sole trader business structure is very simple and services many small business owners well. More complex business structures include partnerships, trusts and companies. These structures can provide business owners with many benefits that are not available to sole traders. All business structures have advantages and disadvantages, so the best structure for a business person is the one that satisfies their needs and requirements. Companies are incorporated (come into existence) through registration with the Australian Securities and Investments Commission (ASIC). Australian companies are regulated by ASIC and must comply with the Corporations Act.
The advantages of rolling over a business from a sole trader structure to a company include:
- Reduced risk – as companies operate with limited liability.
- Reduced tax – a company has a 28.5% or 30% flat tax rate.
- Ability to retain profits – companies can retain profits to fund future growth.
- The sale of a sole trader business to a company is a capital gains tax event and would normally create a taxable capital gain for the sole trader.
Under the replacement asset rollover the capital gain on sale of the sole trader business to the company is deferred if the transaction is structured as follows:
- The sole trader transfers the business assets (including any business liabilities) to the company in exchange for ordinary shares in the company.
- After the transaction is complete the sole trader must own 100% of the ordinary shares in the company.