One of the first decisions you’ll have to make when you’re starting a trade or service business is the structure that you’ll work under. Many professionals will choose to start as a sole trader, but there are a lot of benefits to kicking off as a company as well. Which is better? It all comes down to what would make more sense for you, so let’s check out the differences.
What is a sole trader?
The simplest business structure, a sole trader is an individual who is the sole owner and operator of a business. Setting up as a sole trader is pretty common for tradespeople, allowing them to earn work in their field of practice, get paid directly for each job, and manage the type of work they undertake. It’s easy, flexible, and gives complete control over all decision-making.
One of the benefits of a sole trader business is that it involves low setup costs and less complexity to maintain than other business structures. However, there is also no separation between you as an individual and your business.
What is a company?
Where a sole trader is a business in itself, a company is a separate entity that exists independently of any one person. This extra separation gives individuals greater protection for their personal assets, but companies are naturally more complex to set up and run.
Companies are typically larger than sole trader practices, with a variety of employees and workers. This can help your business to appear more professional to clients, increasing your chances of landing more jobs, scaling up, and expanding your capacity for more extensive work.
The difference between sole trader and company structures
When weighing up the options of company vs sole trader for your own business, it’s important to consider them next to each other, and how they stack up in key areas of management. Here are some of the key aspects of running a business, and the difference between company and sole trader structures in practice.
Control
Sole traders have complete control over their businesses, with full autonomy to decide how their business operates, and the type of work they take on. It’s the perfect way to ‘be your own boss’, which is a huge selling point for a lot of trade professionals.
Control of a company will depend on its size. If a company is still relatively small, control might be really similar to a sole trader operation, with one person acting as the lone director and shareholder. However, as companies grow, multiple people typically become shareholders and have a say in how the company operates. Over time, a company may also appoint multiple directors, who will each share the responsibility of governing the company and managing its work.
Liability
Sole traders are personally liable for any debts or legal issues related to their business, which can put their personal assets at risk. This is referred to as ‘unlimited liability’. By contrast, companies have what is called ‘limited liability’, which means that the company as a whole is responsible, instead of any one individual.
Limited liability keeps personal assets protected, aside from the amount that a person may have invested into the company. However, companies can own property or assets that belong to the business, and not to an individual. These assets can be used by the company to pay any potential debts. If you plan on carrying risk in your business — like working on large building projects, for example — limited liability can be a huge benefit.
Finances
Sole traders do not need to set up a separate business bank account from their personal one. This is because the Australian Taxation Office (ATO) treats any money earned by a sole trader as individual income. Since this income is taxed at the individual rate, sole traders do not need to lodge a separate tax return from their individual one; instead, they can put their business income and expenses in the ‘Business and Professional Items’ section. Sole traders have less access to tax deductions than companies.
For companies, business income is separate from personal, and the company is responsible for managing PAYG tax withholding for all employees as well as establishing a separate business bank account. Money earned by the company belongs to the company itself, not any directors or shareholders. Companies must pay tax at the corporate tax rate, and complete administration like company tax returns, annual financial statements, and potentially audits.
Running costs
Sole traders have fewer setup and running costs than companies, only needing to pay to register a business name and update it annually. Other the other hand, companies need to register both a business and a company name, and pay an overall company registration cost of $597. To keep a company registered, the directors will also need to pay an annual review fee to ASIC to stay registered.
When should a sole trader become a company?
In business, you’re thankfully not locked into a single business structure forever. If you started as an individual, it’s possible to go from a sole trader to a company, though it does take a couple steps. If you’ve researched all the obligations of a company and feel like that’s right for you, the first step is to apply for Australian Company Number (ACN), company name, and a new ABN, through the Business Registration Service. After that, you can transfer any licences and assets to your new company, including any trademarks, and then cancel your sole trader ABN.
It’s also possible to convert from a company to a sole trader, though it is a lot less common. You need to finalise any tax obligations for the company, cancel any registrations, and apply for a sole trader ABN. Once everything is finalised, you can deregister the company.
Should I be a sole trader or company?
Choosing a sole trader or company structure has a lot of impact on how your business will run, so you need to be really thoughtful about it. Some of the main factors to consider include:
- Business size: Small and new businesses can kickstart as a sole trader really easily, but if you have ambitions to grow and take on large contracts, the structure of a company might suit you better.
- Risk level: For businesses that conduct high-risk work, the limited liability of a company can help keep your personal assets safe. If you don’t plan on doing a lot of risky work, you can manage as a sole trader.
- Tax benefits: Sole traders don’t have as much access to tax benefits and deductions compared to companies, but this only matters once your income is significant. Consider chatting to an accountant to figure out which structure would give you the best options.
There are a lot of benefits with either structure, but the right one for you will depend on your business goals and your plans for growth.
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