There are real advantages in choosing a structure best suited to the way you want to operate your business. It’s important you understand these advantages and responsibilities as they may affect the way tax applies to your business, the protection of your assets, your operating costs and how other businesses deal with you.
If you operate your business as a sole trader, although you may decide to have employees, you trade, control and manage all aspects of your business. This is the simplest form of business structure.
Things to consider
You are not considered an employee of your own business and are free of any obligation to pay payroll tax, superannuation contributions or workers' compensation on income you draw from the business. However you must make super contributions, PAYG withholding payments and workers compensation payments for any eligible workers you employ including apprentices.
Sole traders are taxed as individuals. As a sole trader, you must report the business income you earn (after expenses) on your personal tax return, along with any other income you earn (such as salary or wages, interest, dividends). You pay the same tax as any other individual and you are also entitled to the tax-free threshold (the first $18,200 you earn in an income year) if you're an Australian resident.
A company is a separate legal entity capable of holding assets in its own name and conducting business in its own right. Shareholders own the company while directors run the company. In many cases company directors are also shareholders, along with company employees. If you operate your business as an incorporated company, the business is a distinct legal entity that is regulated by the Australian Securities & Investments Commission (ASIC). A company is a more complex business structure.
Things to consider
The tax requirements for a company are quite different to that of a sole trader business structure. It has its own tax income liability which is totally separate to individual income tax. A company pays income tax at a flat rate of 30% on taxable income which may be an advantage for businesses with high profit levels.
Your company must lodge an annual company tax return to report its income and deductions, and the income tax it is liable to pay. All companies must pay their own income tax. If you receive wages or director's fees from your company, you need to include them in your individual tax return and pay tax on them at the individual’s tax rates.
Your company must make super contributions and workers compensation payments for any eligible workers it employs, including you as a company director.