Starting a small business is often full of more questions than answers. One of the questions you might ask is ‘how do I structure my business?’. Two of the main structures are a sole trader and a company. In this article, we’ll discuss the differences between these two structures and how a limited company could benefit you.
What is a Sole Trader
A sole trader is the simplest business structure as it is inexpensive to set up and also easy to operate. Put simply, it is a structure which allows an individual to trade as a business. There is no separation between the business and the individual business owner. Whilst a sole trader can employ people and claim deductions, business profits form part of the individual’s assessable income.
Moreover, as a sole trader a business owner is legally responsible for all the business’ debts, losses and obligations. Unlike other business structures, they cannot share these liabilities with other individuals.
What is a Limited Company
Unlike a sole trader, a company is its own separate legal entity with higher setup and administration costs. This means that it retains all its profits, lodges its own tax return and pays tax at the relevant company tax rate. It also means the controllers of the company are not personally liable for debts or losses.
Additionally, there can be different kinds of companies. A private limited company (abbreviated as ‘Pty Ltd’) limits the liability for debts incurred by the company to a specified amount. Often this is the amount that an individual shareholder paid for their share(s) in the business. As shares are often paid for upfront, a shareholder is not liable for an amount any larger than that upfront investment.
Advantages of a Sole Trader
Some of the main advantages of a sole trader business structure are:
- Inexpensive to set up
- Simple to operate
- Is able to hire employees
- No regular reporting obligations in addition to yearly tax return
- Can use individual’s existing tax file number
- May be eligible for the small business tax offset
Advantages of a Limited Company
Some of the main advantages of a limited company are:
- Business owner’s liability is limited to a specified amount (usually their investment amount)
- Entity pays tax at the relevant corporate tax rate, the highest of which is currently 30% at the time of writing
In summary, a sole trader is a simple and inexpensive business structure which allows an individual to trade as a business. As the individual is the business, tax is paid at the individual rate and the individual is also liable for all debts and losses the business incurs. On the other hand, a limited company has higher setup costs and reporting obligations but pays tax at the relevant corporate tax rate and provides the owners limited liability.
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