Choosing a business a sole trader vs company business structure can be confusing as each individual’s business situation is different.
In our experience, many business owners consider between a sole trader vs company business structure when they’re looking to reduce tax liability, grow their business and to limit their personal assets from risk.
In a nutshell, sole trader structures are cheap and easy to set up but are riskier as the owner will be personally liable for the business. You operate with a shared tax file number (TFN) and Australian business number (ABN) as you and the business as are a single entity.
Setting up a company is slightly more expensive but offer better protection, less risk and more flexibility in terms of tax purposes as it operates as a separate legal entity. If you intend on growth, a pty ltd company structure may be ideal for you.
It’s important to note that each business’ situation is different and requires an assessment made either by a qualified accountant or lawyer when considering all factors between a sole trader and a pty ltd company structure.
Read our guide on comparing Company vs. Discretionary Trust Structures
This is a detailed guide explaining the differences between operating the business as a sole trader vs company. You can check out this side by side comparison as well as a video we made that explains the differences between a sole trader and a pty ltd company.
Although this summarises both structures, you should speak to your small business accountant to work out what the best structure is for your contracting business.
|Setup and costs||Obtaining an Australian Business Number (ABN) – free.
Business name registration (if applicable) – one year ($34) or three years ($79).
Separate business bank accounts(recommended, but not compulsory) – bank fees may apply.
|Obtaining an Australian Business Number (ABN) –free.
Company registration -$900 (plus GST) for a proprietary limited company
Must have a separate business bank account – bank fees may apply.
|Taxation||Sole traders are taxed as an individual. Report your business income in your individual tax return.
The 2018-19 tax-free threshold is $18,200.
The amount of tax you pay will vary depending on factors such as your income and deductions you can claim.
The highest marginal tax rate is at 47% (including Medicare levy & temporary budget repair levy)
|Companies are taxed as a separate entity. Report company income in the company tax return.
There is no tax-free threshold for companies.
The company tax rate for 2019 – 20 is 27.5%.
As a director, you need to report any income you earn from the company or other sources in an income tax return. You may also need to lodge a fringe benefits tax (FBT) return if you receive fringe benefits.
|Ongoing cost and admin||A sole trader is a simple business structure, so it generally has less paperwork and lower ongoing costs.
|A company is a more complex business structure, so it generally has more paperwork and potentially higher ongoing costs. It’s also governed by the Corporations Act.
|Income||The money you earn is treated as your individual income.
You can claim deductions for costs incurred in running your business.
You can withdraw money from a business bank account (separate business bank accounts are recommended, but not compulsory).
|Money earned by the company belongs to the company.
A separate business bank account is mandatory for a company.
As a director, the company may pay you wages or directors’ fees.
You may also receive money via shares, dividends or loans.
|Liability of debt||You are. Sole traders are personally liable for financial or tax debts.
There is no division between business assets or personal assets, (including your share of joint assets, e.g. house or car).
Assets in your name can be used to pay business debts.
|The company is generally liable for all business debts.
As a director, you are personally liable for the tax debts of the company
|Employment||Yes, you can employ staff as a sole trader business structure.
You will require workers’ compensation insurance when you employ staff
|Yes, you can hire staff under the company business structure.
The company will require workers’ compensation insurance.
|Other||Once the sole trader dies, the business will end.||The business can still run after the death of the director with the benefit of perpetual succession.|
Advantages of a Sole Trader
- Cheaper and easier than a company to setup and maintain
- One single tax return and accounting fees
- If your sole trader business is generating low income, then there are potential tax benefits due to progressive income tax brackets rather than a flat tax rate for companies
- No worker’s compensation required if you don’t employ staff
- No super contributions required on your director’s drawings
Disadvantages of a Sole Trader
- You are liable for the debts owed by the business which puts your personal assets at risk
- If you’re generating a high income, you have fewer strategies to choose from to reduce tax
- When the sole trader dies or retires, the business ends
- There’s reduced flexibility for tax planning
Advantages of a Company
- Your personal assets are protected from any losses incurred by the company vs sole trader where you’re liable for all losses
- Increased flexibility for tax planning
- You can introduce shareholders, equity and raise capital for the company
- Income is able to be split to reduce tax liability (seek an accountant’s guidance to do this)
Disadvantages of a Company
- Higher cost to maintain and establish
- More time consuming to maintain – separate tax returns
- Winding up a business can be costly and slow
Which Is Best? Sole Trader or Company?
Deciding between a sole trader vs company is dependent on many factors. Given that each individual’s situation is different and your goals can vary, it pays to consider what is important to you and the nature of your business. This should help you formulate a decision between deciding on either a sole trader or a pty ltd company.
Engaging in an accountant to decide between a sole trader vs company can help you figure out what your exact needs are and which structure for your business may be best to help you achieve these goals.
Box Advisory Services has over 30 years’ combined experience in assisting small business owners and contractors in establishing or re-structure their business structure. To find out how we can help you, book a free consultation with us to assess your situation.
Sign up to our monthly newsletter where we share exclusive small business and contractor advice!
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.