Should you class your business as a sole trader or a company?

You’ve got some thinking to do. Evaluate the pros and cons of each of these business structure types and the right path should make itself clear.

Sole Trader
Company
Changes in business structure

Sole Trader

A sole trader is a business that is being run under an individual’s name. People who opt for this business type can usually get started without any formal or legal processes.

Pros

  • Quick and cheap (you can start trading with your own name and an Australian Business Number)
  • You are personally entitled to all profits
  • You’re able to employ others to help run the business 
  • You control, manage, and own the business

Cons

  • You’re personally liable for business taxes, business debt, and any claims made against you. In some situations, even your home can be placed at risk
  • Profit can’t be split effectively for tax purposes. If you earn a reasonable amount, the highest tax rates will apply

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Company

The most frequently chosen

Registering as a company turns your business into a separate legal entity. Amongst the benefits, one stands out: the business assumes ownership of assets and responsibility for debt.

Pros

  • Your business gets a more commercial look and feel (it’s perceived as a sign that you can be trusted to be here for the long-term)
  • You get a degree of tax flexibility, with the option of retaining profits in the company or paying them out to shareholders
  • Your personal liability is restricted, which gives business owners some protection from creditors and other claims
  • Shareholders’ liability for losses is limited to the value of their shares in the company

Cons

  • Incorporation costs money
  • Your company must produce annual financial statements and file its own tax return. All of our packages cover you for the financial statements and up to three tax returns (no matter if you’re a sole trader or trading as a company)
  • The limited personal liability of shareholders doesn’t extend to directors in full. If you, as a director, fail to carry out your statutory duties (they’re set in the Corporations Act), you may be personally sued for breach of duty
  • The company must file an Annual Statement with the Australian Securities and Investment Commission (ASIC) each year. Your Annual Statement and its $276 filing fee is included in almost all of our packages
  • The ATO and ASIC have strict procedures for companies to cease operations. These include cancelling GST and PAYG registrations, distributing company assets (which may have GST and tax implications), preparing final financial statements, as well as additional shareholder and director resolutions

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Changes in business structure

Given the highest marginal tax rate for individuals is 47% (including the Medicare Levy) and the company tax rate for Small Business Entities dropping to 25% in the 2022 financial year, it may be tempting to reduce your income tax by moving from a sole trader to a company. However, the ATO may well consider this tax evasion if there is no other “Genuine” reason for the restructure.

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Still feeling lost on which structure fits you best? Don’t hesitate to give us a bell and we’ll help you make the right move. [email protected] or 1800 955 089.

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