Many independent contractors and sole traders think that they have to register a limited liability company in order to trade.
This is a common misconception.
In fact, there is very little advantage of registering a company when you’re trading as an individual, and for some it can result in increased compliance costs and headaches. Here’s a quick guide to the most frequently asked questions.
1. Do you have to register a company to be a self-employed contractor?
No. It is often the case that independent contractors can carry out their business as an individual, with no need to register a company.
As an individual, you can still:
- Register for GST
- Raise invoices
- Claim business and home office expenses
- Hire staff
- Depreciate assets
- Have your own website
- Rent a physical premises
- Get business cards
2. I’ve heard that it reduces my risk if I register a company, is this correct?
No. These days, despite them sometimes being called a ‘limited liability company’, registering a company does not necessarily reduce your risk if you are a contractor or freelancer.
Despite the use of a company structure, as the Director of a company you would still be responsible for the activities and actions of that company, and you would still be at risk of litigation. There is no option to ‘hide’ behind a company structure as a way of indemnifying yourself as an individual.
If you work in a high-risk industry, or your client requires you to have further protections, you might want to look at taking out a Professional Indemnity or Public Liability policy.
3. Do I pay less tax if I pay myself through a company?
No. As an individual, the tax rates are all the same, whether you are paying yourself via a registered company, or as an individual.
It’s true that the ATO’s Lower Company Tax Rate is a flat rate of 27.5%, which is lower than the individual top rate of tax, which is 45%. However, this does not mean that you as an individual can pay less tax by earning through a company. As soon as you take any money out of the company for yourself, you would pay the standard rates of individual income tax.
4. Do the ATO or business.gov.au advise independent contractors to register companies?
No. ATO are currently going to great lengths to discourage individuals from unnecessarily registering companies. The advice from the government is very clear - that you should only register a company when necessary, and that for most contractors, this is not required.
If in doubt, check out this article on business structures on business.gov.au.
5. Can I stop trading as a company if I’ve registered one unnecessarily?
Yes. It’s quick and easy to stop trading through your company. You have a couple of options:
- You can make the company dormant, and trade as an individual instead. This gives you the option of ‘reviving’ the company at some point, should your business grow to the level of complexity where a company is required.
- You can apply for voluntary deregistration, which would effectively terminate the company’s status as a legal entity and stop the company from trading. You can then continue trading as an individual instead.
If you need any further information about how to trade as a contractor or sole trader, speak to the team at Hnry.
Hnry is a service designed for independent contractors and freelancers. Our specialist accountants and tax experts are backed by a revolutionary new software that automates tax & other financial admin for self-employed workers - so they don’t have to think about tax ever again.
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