The Complete Guide to Growing from a Sole Trader to a Company

January 17th, 2018

Choosing the right business structure is a critical strategic element for any business owner. For mortgage brokers, it’s essential as you build up your business and start generating more revenue. Your business’s legal structure affects everything from tax and reporting to legal duties, asset protection, and running costs. The sole trader structure offers benefits for small mortgage brokerages, but for medium to large brokerages, the company structure could be more suitable. We look at some of the issues to consider when moving from sole trader to company.

Why grow from sole trader to medium-sized business

As your mortgage brokering operation expands, it can be advantageous to transition into a company structure for a number of reasons. Tax and liability for company debts are among these reasons.

• Tax – Sole traders are taxed as individuals while companies are taxed separately from owners, directors, and senior management. While there’s no tax-free threshold for companies, you pay more than the flat company tax rate (27.5% or 30%) for every dollar of taxable income after the first $37,000.
• Company debts – While a company structure doesn’t automatically protect your personal assets, sole traders are personally liable for debts of the business while directors are usually not. Note: directors can be personally liable for certain things. These include tax withheld on employee wages and super payments.

How does a sole trader business structure work?

The sole trader business structure is easy to set up and has fewer reporting requirements than the a company structure. All you need to do is to apply for an Australian Business Number (ABN), which is free, and a business name. A small annual fee applies, if you’re not using your own name to trade. You will also need to lodge BAS statements. At tax time, you lodge the same individual return but with an additional business schedule. All the assets of the mortgage brokerage are considered your personal assets.

The sole trader business structure is probably great for your mortgage brokerage if you make less than $50,000 to $100,000 a year and have limited liability in your business operations. If you earn more than that or you’re exposed to more risk, like you’re taking on extra debt by buying rather than leasing your premises, you might be better off using a company structure.

Can a sole trader employ staff?

You can employ staff, including administrative staff and other brokers, as long as you obtain workers’ compensation insurance and meet all your other legal obligations. These may include paying super and tax as required, and provider employee entitlements according to the law.

Is a company business structure right for you?

You might start thinking about switching to the company structure when the flat 27.5% or 30% tax rate is more advantageous for your mortgage brokerage, which might be around the $117,000 mark. Limiting liability for company debts can also be a consideration.

If you want to split company income among family members or co-owners of your mortgage brokerage, the company structure could be ideal. Capital raising could also be a good reason to shift to a company structure, as you can raise capital more easily by selling shares in the company.

Changing your business structure

It’s useful to remember sole trader and company are only two of the possible options. Other common options are partnerships and trusts, though trusts are more complicated.

• Sole trader – The sole trader, as noted above, is taxed on an individual basis. It’s the simplest structure and one that’s more beneficial for smaller operations, including mortgage brokers, who can take advantage of the personal income tax rates.
• Partnership – Partnerships are relatively inexpensive to operate, and all partners share income, losses, and control of the business. Partners are not employees of the business, but the partnership can employ people. While the partnership doesn’t pay income as an entity like a company, it does have its own business number and tax file number and must lodge annual tax returns. Partners pay tax on their share of the partnership’s earnings as individuals.
• Company – Unlike a partnership, a company is a separate legal entity for tax purposes, and its operations are governed by the corporations laws.

The option you choose should take into account tax benefits. Weigh up the commercial issues, such as growth. What’s the impression you’re giving to suppliers and customers? They might think you’re a small operation if you’re operating as a sole trader. Again, legal factors, including personal liability, are an important element to consider as you make your decision. Other driving factors could include a change in management or ownership, financial restructuring, and operational reasons.

When is the right time to expand your business?

The right time to expand your business depends on the unique characteristics of your mortgage brokerage. Its growth stage, industry, staff, and unique challenges and opportunities have implications for whether a company structure can offer advantages. These advantages include tax, ambitious growth plans, customer impression of your business, and legal protection. A change in business structure can complement and drive improvements in your internal processes. It can support an expansion of your employee numbers and a change in strategic direction to take advantage of business opportunities arising in the mortgage space.

Things to consider

As you plan your transition to a company structure, it’s important to keep a few things in mind. Recognise what’s uniquely effective about your business, and consider your cash flow and your employees. A financial health check could also give you a smoother transition, so talk to your accountant and/or tax advisor.

Determine the unique factors that are working

If you’re thinking about shifting to a company structure, you’re probably running a successful mortgage brokerage. You’re likely already aware of your brokerage’s unique selling proposition that helps it attract customers. You have probably built up a strong client base and developed close relationships with lenders. You might offer customers personalised attention or target a special niche, such as property investors, who benefit from your personalised advice.

Whatever your unique selling proposition (USP), consider how your switch to a company structure could affect your USP. Could the shift support you in growing your team so you can continue to deliver your USP to happy customers? Can it allow you to grow more quickly to create a new USP and target a new market niche?

Ability to manage cash flow

Cash flow can be a significant consideration for businesses, large or small. For mortgage brokers, who are paid by lenders when loans are finalised, the ability to manage cash flow can be instrumental for the business. As you plan your shift to a company structure, you should think about how it impacts your ability to manage your business’s cash flow.

For example, could shifting to the company structure support a better cash flow position by allowing you to sell shares, access more capital, and expand your operations more quickly? Enhancing your cash flow position can lead to benefits in other areas of your mortgage brokerage, such as improving your ability to deliver on your USP and supporting you in stronger marketing campaigns (with bigger budgets). Cash flow is the lifeblood of every business, so make sure your shift to a company structure is timed well to support your cash flow position and changing cash flow needs.

Financial health check

It’s worthwhile to do a financial health check if you’re considering or planning a transition to a company structure. Consider the key questions. First, have you got money to pay your bills when they become due? Second, is your business profitable? Third, are you getting the kind of returns you’re looking for from your business?

You can answer the first question by looking at your liquidity ratios, including your working capital ratio. Common solvency ratios and profitability ratios will answer questions about profitability and returns. You’ll want to take a look at your gross profit margin ratio, net profit margin ratio, gross profit versus net profit, and return on investment for insights about profitability. Other useful financial indicators are your management ratios and balance sheet ratios, and standard financial health ratios like debt to equity ratio and loan to value ratio.

How to grow your businesses

As you transition from a sole trader mortgage broker to a busy brokerage of multiple brokers and administrative staff, you’ll ideally have a plan for growing your business.

• Vision and plan –Having a vision and a plan for how you’re going to achieve it gives you a blueprint for your goals.
• USP – Understand why you’re different and use this point of differentiation as a unique selling proposition. Base your marketing message on your USP so customers understand what they’re getting from you and how you’re different from your competitors.
• Business systems – Great business systems allow you and your team to handle growth without disruption. Use organisational charts, customer management systems, and templates for operational processes.
• SWOT analysis – Conduct a SWOT analysis regularly to understand your mortgage brokerage’s strengths and weaknesses. From your SWOT analysis you’ll not only identify what you need to work on but also opportunities and threats in the market. You’ll come away with a list of priorities that tell you what to do to keep your mortgage brokerage competitive and thriving.
• Drive your team to success – Align your staff and keep them motivated with an effective HR system. Formalise roles, build understanding of roles, and communicate expectations. Hold people accountable and reward them for good performance. Offer training and mentoring where appropriate.

Great people are vital to sustaining your business

Hiring and retaining the right people is vital to creating and sustaining a thriving mortgage brokerage. To attract the right talent, you need to pay your employees an attractive market salary and provide entitlements. These employment conditions are governed by legal rules that you can formalise with compliance procedures. Certain tax benefits might only be available under a company structure, so consider this as you plan for your human resources.

• Finding great people – A great recruitment process helps you find the right people. Plan your recruitment process carefully, from the job advertising stage to background checking and references. Adopt a systematic approach so every candidate is screened for cultural fit and skills. You can approach each stage systematically, whether it’s resume screening, writing a skills criteria list, pre-interview telephone interviews, and the interview itself. Prepare an extensive list of interview questions and use the pre-interview telephone calls to eliminate candidates. Behavioural job interviews are excellent for testing how staff will perform on the job in your mortgage brokerage.
• Managing growth with organisational charts – Growth is an exciting prospect but going from one or two people to a team of 10 or more can mean major changes. If you’re well prepared for the transition, it can be a successful one. Use organisational charts to plan for expansion and to create an effective organisational structure as your company grows. You can use it to design teams and departments, plan for future employees, and better understand your organisational capacity. Use organisational charts to identify capacity needs and trends, and refer back to your charts to visualise your staffing strategy and how it aligns with your company one.

Achieving success

Your mindset and habits as the director of an expanding mortgage brokerage are as important as having a plan and doing a regular SWOT analysis. Adopt the habits of top entrepreneurs to see your mortgage brokerage scaling to new heights.

• Focus – Staying focused in the face of constant challenges and a fast-paced environment means you stay objective as you keep the important things in mind. Focus on the few key objectives that will drive the success of your operations.
• Pick a superb A team – Your investors, co-owners, key employees, and advisors should be the most experienced and qualified people you can find.
• Always go back to the customer – Remind yourself it all comes back to your customers. As market conditions change, so might your customer base. Keep abreast of changes in customer preferences in the mortgage market, and anticipate shifts in demand.
• Concentrate your resources – Keep your resources concentrated on the market segments in which you have the most competitive advantage. Rather than spreading your mortgage brokerage’s resources too thin, look for opportunities to grow and niches you can work nimbly to address.
• Be open to new skills – You might be a great mortgage broker, but as your business expands, you’ll probably realise you need to develop extra skills. Successful entrepreneurs in the mortgage field combine their technical knowledge of mortgages with strong business acumen.
• Grow wisely versus growth for growth’s sake – Bigger isn’t always better, so adopt a mindset of growing responsibly. Make sure your growth plans are in alignment with the available working capital. Look for ways to grow incrementally so you’re scaling up without excessive risk.

Leveraging partners and tools

Customers can’t work with your mortgage brokerage if they don’t know about it, so look for innovative ways to expand your exposure. As Australia’s leading mortgage aggregator, Connective makes a great business partner – with more than 10% of all home loans in the country written by a Connective broker and a loan book valued at $117 billion. By becoming a member, you’ll gain access to over 40 top-tier lenders, our award-winning software platform, and world-class training and support. Download our info pack now, or contact us for more information.