Oct 23, 2014
Starting a Business: Sole Trader vs Company
Starting your own business is an exciting period where the freedom of being your boss becomes a reality. At the same time, there are certain practical things to keep in mind, such as what type of business structure will be best for your situation.
Choosing a business structure can be difficult, especially if you’re not aware of the benefits of each. The table below shows some general information on the differences between Sole Trader and Company structures. Depending on your situation you may prefer a certain features of one structure that will help you decide what’s right for your business.
Liablity
Sole Trader
Unlimited liability. Loans and business expenses area usually secured by personal assets.
There are advantages for both structures so carefully consider which best suits your unique situation before making your decision.
Company
Limited liability for funds within the company.
Authority
Sole Trader
There is no requirement to appease to in terms of decision-making.
Company
The Corporations Act (2001) instructs that the majority of decisions will be made on behalf of a company by the directors. However, the Act also sets out other decisions that will be made by shareholders.
Start Up Capital and Costs
Sole Trader
Sole Trader (ST) structures don’t allow for shares so if a ST wants to raise capital they will need to get a loan or form a partnership with another ST.
Company
Companies can secure capital from outside parties from offering them shares for investment.
Succession
Sole Trader
Once the ST dies, the business cannot be transferred or passed on, the assets will be dealt with through the ST’s personal estate.
Company
Companies have the benefit of perpetual succession and are separate legal entities and can therefore survive despite the death of a director/s.
Retained Profits
Sole Trader
ST’s cannot retain profits, in the hands of the sole trader, profits are income which is taxed at the sole trader’s personal marginal rate.
Company
Companies can decide if they want to distribute profits to shareholders or decide whether to keep them and use it to grow the company.
Tax Losses
Sole Trader
Sole traders can deduct losses from one source against assessable income from another source. For example, if the sole trader sustains a loss in respect of a rental property, that loss can be offset against the income derived from the sole trader’s business.
Company
A company which runs more than one business can offset losses from one business against sources of income in other businesses.
Similarly, a company in the same consolidated tax group as other companies can offset losses and other sources of income when submitting the group’s return.
Registration and Fees
Sole Trader
There is no registration or ongoing maintenance fees for Sole Traders.
There may be business licensing fees also, but they will generally be lower than company fees.
Company
It is $645 to register a company with Easycompanies, which includes your ACN, company constitution, share certificates and ASIC certificate (As of 2020).
Companies have various ongoing fees including an ASIC annual review fee of $276.
Summary: Sole Trader
Sole trader structures are fairly inexpensive and to set up, require little ongoing maintenance and have freedom in decision-making within the business.
However they do not have the benefit of limited liability, which means that all the owner’s personal assets are not secure if the business goes bankrupt or debts need to be repaid. Also if sole traders wish to raise capital, they will have to guarantee this with their personal assets, creating high level of risk for the sole trader, especially if business isn’t going well or legal action is taken.
For these reasons, more people are choosing a company as their preferred business structure.
Summary: Companies
Companies are slightly more expensive and complicated to set up than sole trader businesses. However a company structure provides better protection for its shareholders and offers more flexibility in terms of tax purposes. There is also more freedom in how profits within the company are allocated and less risk associated with taking out loans or raising capital.
Companies also enjoy the benefit of limited liability, meaning that the director’s personal assets are protected, regardless of the debt the company may be in. This is also a preferred structure in order to protect the assets of the company, such as intellectual property, or in the case some where legal action may be taken.
