Many business owners begin as sole traders and shift to a company structure later on. However, whether this will be appropriate for you depends entirely on your individual circumstances. Here’s our guide to the difference between these structures and when they may benefit you.
Key takeaways
Sole traders have full responsibility for their business’s operations.
Companies are a distinct legal entity separate from the business directors and members.
A sole trader can provide simplicity and control over a business, but gives you unlimited liability.
A company structure is more complex but may provide greater liability protection.
A business lawyer can help you understand your liability and manage your legal obligations.
Sole trader vs company at a glance
Here’s an overview of what these structures are and how they function.
Sole trader business structure
A sole trader is the simplest structure that a business can take. The individual running the business is legally responsible for all aspects of its operation. This includes business debts, daily decisions that need to be made, and any losses the business incurs. Some of the key aspects of a sole trader are the following:
Having total control of your personal and business assets and operations.
Generally having simpler and lower-cost reporting requirements.
Typically not needing a separate business bank account.
Accepting unlimited personal liability, which can put your personal assets at risk.
Being personally liable to pay tax on business income.
Using your individual tax file number (TFN) to lodge tax returns.
Being personally responsible for paying business debts.
Becoming a sole trader is relatively fast and inexpensive. You only need an Australian Business Number (ABN), which has no registration cost. Depending on your annual turnover, you may face Goods and Services Tax implications.
Company business structure
A company is a separate legal entity under the Corporations Act 2001 (Cth). They are able to perform certain functions in its own right, such as:
Take on company debt.
Enter into contracts.
Pay tax at the company tax rate.
Maintain its own financial records and reporting.
Two crucial roles in a company structure are members and directors. Members (or shareholders) have ownership shares in a company. Directors, who may also be members, are responsible for the management of the company. Important elements of a company include:
A more complex and expensive structure to set up and operate.
Business debts and earnings belong to the company.
An annual company tax return must be lodged with the Australian Taxation Office (ATO).
Members and directors must understand their obligations under the Corporations Act.
Members of a company limited by shares generally have limited liability for the company’s debts. Directors can still be personally liable in some situations, such as insolvent trading or unpaid PAYG withholding, GST and superannuation.
You must complete a mandatory annual review with an annual review fee.
The company pays the company flat tax rate on its profits rather than your personal income tax rate.
Companies must register with the Australian Securities and Investments Commission (ASIC) for a fee, and typically come in the following forms:
A proprietary limited company (a Pty Ltd company), which may not offer shares to the public.
A public company, which may take on members of the public as shareholders.
When staying a sole trader makes sense
Some of the major benefits of being a sole trader are simpler administration, control over all aspects of the business, and typically lower administrative costs. However, this comes at the cost that, as the business owner, you have no liability protection. Here are some circumstances where being a sole trader may make sense:
When pursuing a new small business idea, you might not know exactly how much income you can expect to generate. The simplicity of being a sole trader may reduce your ongoing costs, depending on your circumstances, and avoid the difficulties of more complex business structures.
A business that doesn’t need investment in expensive machinery or is unlikely to incur significant debt may work in a sole trader structure. This could include an online business that you’re able to operate by yourself.
Being a sole trader may be appropriate if you would benefit more from taking the profits of your business as personal income, rather than retaining the profits in the business.
When it's time to move to a company structure
While becoming a company isn’t automatically better in every circumstance, there are situations where it may make sense, such as the following:
Your business is starting to face more risk. This could involve accepting larger contracts and taking on more debt. A company structure provides some separation between the company and your personal assets.
As your business grows, its operations may become more complex. Incorporating the business may give you a better framework for scalability than a sole trader.
It can be easier for a company to raise capital and attract external investors to fund growth. Sole traders can often struggle to attract investment.
A company structure can make it easier to bring other owners on board. It may give you a clearer way to define each owner’s stake in the business.
Are you trying to find the right business structure?
The Summit Legal Services team is experienced in helping business owners understand their governance and compliance obligations. Professional help can assist with critical considerations, like the following:
Assessing how your business structure affects your personal liability.
Setting up new ownership arrangements.
Identifying potentially expensive legal issues before they arise.
Business arrangements can also have significant tax and superannuation obligations. Working with a registered tax agent can be important to understand matters, such as GST and organising separate business tax returns for business operations.
Contact us today for an initial consultation to see how we can help you manage your legal obligations as a business owner.
Disclaimer: This article provides general information only. It is not legal advice. Legal outcomes depend on your circumstances. Speak with a lawyer before making decisions about your matter.
