The main difference between a sole trader vs company is the following;
- a sole trader traders under an ABN in your personal name; and,
- a company is a separate legal entity with its own ABN, ACN & TFN
So, what does this mean?
From a tax perspective, any profits (income less expenses) earned under a sole trader ABN/business are taxed in your personal name. With this in mind, the individual tax rates go up to to 47%!
Whereas the company tax rate is capped at 27.5%. As a result of capping the tax rate, you will pay less tax and have the ability to use those excess funds to grow your business.
In the early stages of business, the tax savings are crucial to success. With this in mind, by operating under a sole trader structure, you could be setting yourself up for business failure!
What about risk?
If you get sued and you operate as a sole trader structure, your personal assets are at risk.
What could go wrong in business? Everything that can, does go wrong at some point. Ask any business owner about the highs and lows of business and you’ll hear some battle stories.
In contrast, a company is treated as a separate legal entity and liability is generally limited to the company. There are times that a Director may be personally liable such as a case of unpaid employee wages, super, & PAYGW.
Overall, a company is great for asset protection and keeps your personal assets safe.
If you are starting a business & not a hobby, the risk of a sole trader structure alone should push you towards incorporating a company within your group structure.
But I don’t have any personal assets you say?!
What happens if you become liable for $100,000 in damages from a contract dispute, or loss of income from a trademark dispute or something else?
You may be forced to become bankrupt which will limit your personal ability to get a loan. Apart from financial effects, the less talked about side (your mental wellbeing) is definitely not worth the risk.
What are the costs?
The cost to establish a company is $496 which is paid to ASIC. It is recommended to through someone like POP who charge $1,000 plus GST (inclusive of the ASIC fee), which ensures your company registration is done correctly.
Included in the $1,000, you’ll receive the company constitution, minutes, and expert advice to ensure your company is set-up right.
Based on the tax complexities of changing structure, it can be very expensive to change down the track, so get it right from the outset.
Apart form the initial set-up costs, each year a fee is payable to ASIC of $267 ($267 for 2019, changes slightly each year).
A company tax return will be required annually and its cost will be determined by the size and complexity of your business.
What’s better for getting external investment?
A company is best for external investment as it allows you to sell portions of your company via shares. Let’s say you have 100 shares in your company. You could sell 20 shares ie. 20% to get investment.
It is important to note, if you are getting investment, make sure you get professional advice upfront from a qualified accountant or a reputable business advisor.
On the contrary to a company, a sole trader cannot share equity/ownership. In other words, a sole trader limits the ability to scale through external ownership.
So, what’s better? A Sole Trader vs Company?
Are you starting a business or are you doing a hobby with small earnings?
If a business, trade as a company.
If a small hobby, trade as a sole trader.
Are you looking to start a business? Get in touch today and ensure your business structure is right from the start.