Sole Trader or Company – Which One is Right for You?
How to Find the Right Business Structure for you
Starting a business requires many decisions to be made, the first of which is what type of form your business will take. The purpose of this guide is to give you some general information that could help you understand what it means to register as a sole trader or company.
When starting a business, it is always a good idea to give plenty of thought to what type of structure your business will run under. This is an important consideration for any prospective business owner. This decision will influence many aspects of your business, including what type of bank account you should open, what kind of taxes you will pay, the insurance you will need to purchase, and most importantly, the extent of liability that you will have if things don’t go according to plan.
The two most common business types that people choose to operate under are as a Sole Trader and as a Company.
What is a Sole Trader Business Structure?
A Sole Trader is a person trading as the individual legally responsible for all aspects of the business. This includes any debts and losses, which can’t be shared with others. This is the simplest, and most inexpensive business structure that you can choose when starting a business in Australia. As a Sole Trader, you’ll generally make all the decisions about starting and running your business, although you can employ people to help you.
Registering as a Sole Trader typically:
- Is simple to set up and operate
- Gives you full control of your assets and business decisions
- Requires fewer reporting requirements and is generally a low-cost structure
- Allows you to use your individual Tax File Number (TFN) to lodge tax returns
- Has unlimited liability. This means that all your personal assets are at risk if things go wrong, as they could be seized to recover a debt. This also means that any losses incurred by your business may be offset against other income earned (such as your investment income or wages), subject to certain conditions
- Doesn’t require a separate business bank account, unlike a company structure. Although it is recommended you have a separate bank account so you can easily keep track of your business income and expenditure
- Requires that you keep financial records for at least 5 years
- You will not be considered an ’employee’ of the business. You should pay yourself, which is usually a distribution of your profit, but this is not considered ‘wages’ for tax purposes
- If you’re a business owner without employees, there’s no obligation to pay payroll tax, superannuation contributions or workers’ compensation insurance on income you draw from the business. You can choose to make voluntary superannuation contributions to yourself though, to help you build up your superannuation
- You can employ people to help you run your business. There are compulsory obligations that you must comply with, such as workers’ compensation insurance and superannuation contributions
- It’s relatively easy to change your business structure if the business grows, or if you wish to wind things up and close your business
What is a Company Business Structure?
A Company is a separate legal entity, unlike a Sole Trader or a Partnership structure. This means the company has the same rights as a ‘natural person’ and can incur debt, sue and be sued.
The Company’s owners (the shareholders) can limit their personal liability and are generally not liable for company debts. A Company is a complex business structure, with higher set-up and administrative costs because of additional reporting requirements. To do this, you will need to register a company with the Australian Securities and Investments Commission (ASIC). The legal obligations of Company Directors and Officers are outlined in the Corporations Act 2001 (Cth).
Registering as a Company typically:
- Means your business is considered a separate legal entity
- Has limited liability compared to other business structures
- Is a more complex business structure to start and run
- Involves higher set up and running costs
- Requires you to understand and comply with all obligations under the Corporations Act 2001 (Cth)
- Means that business operations are controlled by directors and owned by the shareholders
- Must be registered for goods and services tax (GST) if the annual GST turnover is $75,000 or more
- Means the money the business earns belongs to the company
- Requires an annual company tax return to be lodged with the ATO
Comparing both structures
Sole traders and Companies both have benefits which can serve the needs of the type of business you’re starting. However, it is important to remember that the conversion from being a Sole Trader to a Company is a much simpler process than reverting from a Company to being a Sole Trader. The key question to ask is whether you are happy to bear all the liabilities of your business, or if you want your business to operate as a separate legal entity.
Whichever option you choose, it is important to seek legal advice before commencing operations and to make sure you understand the business structure you are taking on.
Don’t know where to start? Contact a LawPath consultant on 1800 529 728 to learn more about what business structure is right for you, customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.
Jackie is the Content Manager at Lawpath and manages the content team. She has a Law/Arts (Politics) degree from Macquarie University and is an admitted solicitor in the Supreme Court of NSW. She's interested in how technology can help shape the future legal landscape.