Choosing between a business structure can be difficult, unless an informed decision is made. We will look into what are the key differences in terms of cost, protection and tax etc. Let us have a closer to look:

Factors Sole Trader Company
Setup Cost Sole trader business structures have fewer set-up costs. Costs may include:
Getting an Australian business number (ABN) – free
Registering a business name (if applicable) – $37 for 1 year or $87 for 3 years
Establishing separate business bank accounts (optional)
Companies have more complex business structures.
They have higher set-up costs; these costs may include:
obtaining an Australian business number– free
choosing and reserving a company name – from $51
registering your company – $506 for a proprietary limited company
registering a business name (if applicable) – $37 for 1 year or $87 for 3 years
Record keeping A sole trader is a simple business structure so it generally has less paperwork.

You still need to keep your financial records, including tax returns, for 5 years.

A company generally has more paperwork and potentially higher ongoing cost.

A keep financial records for at least 7 years to comply with the Corporations Act 2001
Companies are subject to annual review by the Australian Securities and Investments Commission (ASIC)

Business income The money you earn in your sole trader business is your individual income.

This means you are also responsible for any tax your business must pay.

You can claim deductions for costs incurred in running your business.

You can withdraw money from your business bank account.

Money the company earns belongs to the company.
Even if you own the company (you are a shareholder), the money belongs to the company.

As a director, the company may pay you wages or directors’ fees, but you cannot draw money from the company as personal drawings.

If you receive funds from company, then you have to show the funds on your individual tax return.

Taxation You don’t need to lodge a separate tax return for your business. Business income and expenses go in your individual tax return.

The 2019-20 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.

Company tax returns are separate and usually need accountant to do annual tax returns.

There is no tax-free threshold for companies.
The company tax rate for 2019 – 20 is 27.5%.

Debt Liability You are personally liable for financial or tax debts in a sole trader business structure.

There is no division between business assets or personal assets (including your share of joint assets such as houses or cars).
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.

A company can own property or assets, and these belong to the company – not the directors nor the shareholders.

Business Insurance Your business activities will determine the type of insurance you need, for example the business type, whether you sell products or services and if you employ people.
You should consider insurance for personal injuries, disability and death, as sole traders aren’t covered by workers’ compensation insurance.
Similar to sole traders, your business activities will determine the type of insurance you need.

You require workers’ compensation insurance if you employ staff.

Drawing Money As a sole trader you can take money out of your business account as personal drawings.
A separate business bank account isn’t compulsory for sole traders, but it is recommended to keep track of your business finances.

A separate business bank account is mandatory for a company.

As a director, the company may pay you a salary, wages or director’s fees, but you cannot simply withdraw money as ‘personal drawings’ from the company. You may also receive money via shares, dividends or loans

Ongoing costs You’ll need to update your business name annually. The cost of a business name registration is $37 for 1 year or $87 for 3 years. Different fees may apply to your company at different points in time, depending on your business operations.

Your company has an annual review date, usually the same date it was registered. Shortly after this date, ASIC will issue an annual statement and an invoice. You need to pay the annual review fee to keep your entity registered.

Employing people You are allowed to employ staff in a sole trader business structure.

You will require workers’ compensation insurance when you employ staff

You can hire staff under the company business structure.

The company will require workers’ compensation insurance.

To summarize, a sole trader business structure is cheap and easy to set up but it is risky as the owner will be personally liable for the business. While companies can be bit more expensive but offer better protection, less risk and more flexibility in terms of tax purposes.

 

If your business will grow in many ways with customers, operations and marketing and keeps gaining more traction in each area than a company structure may be ideal for you. And if you have limited number of clients and comfortable dealing with them than sole trader is advisable to keep running cost and complexity down.

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