Changing from Sole Trader to Company: New Concepts
Changing your business structure isn’t just a paperwork task, it comes with major shifts in how your finances are treated. Before you get stuck into the practical setup (covered in our separate checklist blog post), it’s worth understanding the accounting rules that apply once you’re running a company.
This post walks through the key financial concepts that often catch new company directors off guard. If you're planning to switch from sole trader to company, this is your accounting reality check.
No More Owner Drawings
As a company director, you can’t just transfer money to yourself casually. “Owner Drawings” don’t exist in a company. All payments must be:
Wages (processed via payroll with PAYG and superannuation)
Loan repayments if you’ve previously lent money to the company
Dividends, formally declared and distributed from company profits
Director’s Loan if you’re temporarily borrowing or repaying money
Director Loans Go Both Ways
Money you put in or take out may need to be tracked in Xero as:
Director Loan In (you lending money to the company)
Director Loan Out (you withdrawing funds from the company)
While director loans may seem flexible, they are not a substitute for drawings. If not tracked and repaid appropriately, they can lead to Division 7A tax consequences, including interest charges and reporting obligations.
Understand Retained Earnings and Dividends
Unlike a sole trader, a company holds onto profits (as Retained Earnings). You don’t automatically “own” the money left in the business. Instead:
The company must declare dividends to distribute profit
Franking credits may apply if tax has already been paid by the company
Dividends are income to you personally and must be declared in your tax return
Plan How You’ll Pay Yourself
You’ll need to choose your payment method:
Wages (via STP-enabled payroll)
Dividends (based on profits)
Or a mix of both
If you are planning to take dividends, this should be done in consultation with your Tax Agent. While dividends can be tax-effective, they require correct accounting treatment, legal resolutions, and appropriate timing to ensure compliance and avoid unexpected tax issues.
Further Reading
Check out our companion blog post:
Changing from Sole Trader to Company: The Complete Transition Checklist
Disclaimer
The information in this article is general in nature and provided for educational purposes only. It does not constitute personal financial, legal, or tax advice and should not be relied upon as such. Every business has unique circumstances, and we strongly recommend consulting with a registered tax agent, BAS agent, or legal advisor before making decisions about your company setup, payroll, or financial systems. While care is taken to ensure accuracy, laws and software functionality may change over time.
