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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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.
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.
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.
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.
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.