Sole Trader vs Company

Navigating through the decision-making process of “sole trader vs company” for your business structure can be confusing because both have pros and cons, and a business has its own individual needs to prioritise.

Most people initially choose to start as sole traders. However, as they start to earn more and have to pay more taxes, they often find themselves contemplating whether a different structure might be more beneficial.

So, in this blog, we’ll take a closer look at the differences between a sole trader business structure and a company business structure so you can determine which is better suited to your business’ current and future goals and circ*mstances.

What is a Sole Trader?

A sole trader is an individual runs a business. They are the only owner responsible for controlling and managing the business. This means all decisions, from day-to-day operations to strategic planning, rest on their shoulders, offering complete autonomy and control.

While a sole trader structure can be affordable and simple, it can be riskier because the owner is personally liable for the business. This structure has no legal distinction between the owner and the business.

Advantages of Being a Sole Trader

Some advantages of a sole trader structure include the following:

Less expensive to set up and maintain
Only one tax return is required
The business is entirely under your ownership, control and management
Businesses generating a low income can receive tax benefits
You don’t need to pay worker compensation if you don’t employ staff
You don’t need to make super contributions on your director’s drawings

Disadvantages of Operating with a Sole Trader Business Structure

Along with the advantages, you have to consider the following disadvantages:Your personal assets can be at risk if the business goes into debt

Less flexibility for tax planning

Businesses generating a high income have fewer opportunities to reduce taxes.
Retaining employees of a high-calibre can be difficult.
Limited capacity for growth because you can’t employ partners or co-founders
You keep all profits
The business ends when you pass away or retire

What is a Pty Ltd Company?

A proprietary limited company, often abbreviated as Pty Ltd, is a business structure type where it is its legal entity. This means it has rights and responsibilities separate from those who own or run it.

The business can enter into contracts and legal relations, have up to 50 shareholders and shareholders are not held responsible for company debts. This is because the company has its legal personality, which means it can own property, sue, and be sued in its name. So, the liability of the shareholders is limited, which essentially means their personal assets are protected from the company’s debts and liabilities.

Establishing a company can be more expensive, but it offers better protection and flexibility as a separate legal entity regarding tax. The costs associated with setting up a Pty Ltd company include registration fees and ongoing regulatory compliance, which might involve additional administrative work and expenses.

However, the benefits, such as the protection mentioned above for personal assets and potential tax advantages, often outweigh these costs for many business owners. Having a company can also give customers and potential investors a perception of credibility and permanency, which might be particularly beneficial in certain industries or markets.

Moreover, the tax flexibility arises from the company being taxed at the corporate tax rate and having the ability to access various tax concessions and incentives that might not be available to sole traders.

Advantages of Running a Company

Some advantages of a company include the following:

Disadvantages of Running a Company

Like with the sole trader structure, you have to consider the following disadvantages alongside the advantages:

More expensive to set up and maintain
Separate tax returns make it more time-consuming
Winding up a business can be a slow and expensive process
Profits distributed to shareholders are taxable

Here is an overview of the differences between a sole trader and a company:

	Sole Trader	Company
Set Up Costs	Sole traders don’t need an Australian Company Number (ACN), so they don’t have to register with ASIC. Separate business bank accounts are recommended, but bank fees may apply so if you want to eliminate those, it isn’t mandatory.	Registering a proprietary limited company with ASIC costs $576 in 2024 to receive your ACN. A separate business bank account is mandatory, and it may come with fees attached.
Taxation	A sole trader is taxed as an individual, so you will be required to detail your business income on your personal tax return and pay tax at your individual income tax rate.	A company is taxed as a separate entity, so company income must be reported on the company’s tax return. Companies don’t have a tax-free threshold – they are required to pay tax on all money earned.
Admin and Ongoing Costs	A sole trader business structure is simple, so you can expect less admin and minimal ongoing costs. Because the income and expenses of the business are stipulated on your individual tax return, lodging a separate tax return for a sole trader business is unnecessary.	Companies have more complex business structures by nature, so they typically have more admin and increased ongoing costs. A company owner is required to file two separate tax returns: an individual and a company tax return.
Income	Money earned is treated as your personal income. Deductions can be claimed for any costs incurred during the running of your business.	All money earned belongs to the company. As a director, you can get paid via the company through wages or directors’ fees, shares, dividends or loans.
Liability of Debt	A sole trader is personally liable for financial or tax debts. Because there isn’t any distinction between personal assets and business assets, assets in the owner’s name can be used to pay off business debts.	The company is liable for business debts. They can sell company assets to pay off debts.
Business Longevity	The business will end when the sole trader passes away.	The business can still run if the director passes away.

Key Takeaways

Operating a business as a sole trader can be attractive because of its flexibility and low costs. However, the risk of being personally liable for business debts can cause concern.
A company structure has limited liability and certain tax benefits. But, opening and maintaining a company can be more expensive and highly regulated.
Whichever one you choose will depend on your personal and business circ*mstances and what you are comfortable with at the end of the day.
You’ll need to carefully weigh up the pros and cons of each option and determine which of the disadvantages are least of concern to you.

If you need help making this important financial decision, it can be beneficial to employ the help of a professional.

Contact KNS today to connect with highly qualified business advisors who can guide you through the decision-making process.

FAQs

What Are 3 Disadvantages of Being a Sole Trader?

Personal Liability: Sole traders are personally liable for all the debts and liabilities of the business. This means that personal assets, such as your home or car, could be used to cover business debts.

Limited Capacity for Growth: As a sole trader, you may find it challenging to expand your business due to limited resources and the inability to take on partners or shareholders.

Limited Tax Planning Opportunities: Sole traders might need more support in tax planning and may end up with a higher tax bill as their business income is taxed at personal income tax rates, which can be higher than corporate tax rates.

What Does “Separate Legal Entity” Mean?

The term “separate legal entity” refers to the concept that a business entity, such as a company, is distinct and separate from its owners (shareholders) or operators. This means the company has its own legal rights and obligations separate from those of its owners or directors.

In other words, the company continues to exist even if its shareholders or directors change, retire, or pass away; it can enter into contracts, sue, and be sued in its own name, and it is taxed separately from its owners.

When Should a Sole Trader Become a Company Structure?

The transition from a sole trader to a company often comes into consideration under a few circ*mstances.

When a business starts facing increased liability and risks, the limited liability offered by a company structure can safeguard the owner’s personal assets. Additionally, if a business is looking to raise capital for expansion, the ability of a company to issue shares can be a pivotal advantage.

Taxation can also play a crucial role in this decision; if the business income reaches a level where the corporate tax rate is more beneficial than the individual rate, it might be financially prudent to transition to a company.

Lastly, if the owner wishes for the business to continue beyond their involvement, a company structure that allows for business continuity might be more suitable.

Is It Better to Have a Company or Be a Sole Trader?

Choosing between a company and a sole trader structure hinges on various factors, including risk tolerance, tax implications, and administrative preferences.

A company structure can offer a shield against personal liability and provide more favourable tax rates and planning opportunities as business income grows.

However, it has a heavier administrative burden due to its stringent compliance and reporting requirements.

On the other hand, a sole trader structure allows the owner to maintain complete control over the business. It involves fewer administrative hassles, but it does not offer the same level of personal financial protection as a company.

What Are the Benefits of Being a Company Instead of a Sole Trader?

Operating as a company comes with several benefits, such as limited liability, which protects the shareholders’ personal assets from the company’s debts and liabilities. This structure can also offer certain tax advantages, potentially providing access to a lower tax rate and additional tax planning strategies unavailable to sole traders.

Additionally, a company can facilitate capital raising by issuing shares, enabling easier business expansion and development. The company structure also allows for business continuity beyond the involvement or lifespan of the initial owners and, in some contexts, may convey a perception of stability and professionalism to potential clients or partners.

Disclaimer

Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.