Sole Trader vs Company Structure

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.

SOLE TRADERS

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

• The structure is relatively inexpensive and easy to set up and maintain. Relatively easy to change your legal structure if the business grows, or if you wish to wind things up.
• You have full control of the business and are legally responsible for all aspects of the business. There is no division between business assets or personal assets, which includes your share of any assets jointly owned with another person.
• You receive the full benefit of profits made by the business and keep all the after-tax gains if the business is sold.
• If you have no employees, you usually have to do all the work.
• Your access to finances is usually limited to your own resources.
• Limited opportunity for tax planning. Debts and losses cannot be shared and you cannot split business profits.
• You can lose personal assets such as your home, contents and vehicles if the business goes into debt. Your liability is unlimited which means that personal assets can be used to pay business debts.

Taxation obligations

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.

COMPANIES

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

• Usually, the set-up and administrative costs for a company are higher than for other business structures. However a company structure is commercially well understood and accepted, easy to sell and pass on ownership.
• Ability to raise significant capital. A company has far greater access to capital for the running of the business.
• Profits can be reinvested in the company or paid out to the shareholders as dividends and a company can carry forward losses indefinitely to offset against future profits. However a company cannot distribute losses to its shareholders.
• Limited liability for shareholders/owners. Shareholders are not liable for the debts of the business.
• Increased asset protection. A company’s assets belong to the company and the company is liable for debts incurred which makes this type of business structure appealing to high-risk business ventures. Generally, the owner’s assets cannot be accessed to pay for any company debts or liabilities. However, there are some exceptions. Financial institutions may require a personal guarantee against loans or overdrafts. A personal liability may arise if debts are caused recklessly, negligently or fraudulently.
• A company can also sue and be sued.

Taxation obligations

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.