Sole Trader vs Company in Australia

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If you are finally ready to think along the lines of becoming your own boss and launching your own small business in Australia(which we keep pushing for in our blog), you need to follow certain steps to becoming an entrepreneur.

As we regularly advocate in our blog, starting a small Australian business isn’t as daunting as is normally considered, and the whole process can be broken down into easy-to-follow steps.

Your Small Business launch does not have to involve complex legal obligations or lengthy business paperwork and financial dealings.

All it needs is a skilled and passionate individual (no pun intended) and you can become a sole trader of a business within no time.

Do not get me wrong.

Any business idea would require both time and effort.

But in terms of time, there are no legal complications to stop you from launching your small business idea within a reasonable timeframe.

It is your skills and ambitions which may require a persistent effort and a longer timeframe.

But in case your mind is made up for launching your Small Business and you have been wondering about choosing your options between becoming a sole trader or launching a company, we have got you covered.

In this blog, we’ll provide you with an in-depth guide on the difference between the business structure of a sole trader and a company as per the Australia Government’s rules and regulations.

But you need not fret. We have cut the official lingo and made it easy for you to understand by giving relatable examples.

Let’s start first by understanding the difference between the two.

Difference Between Sole Trader and Company in Australia

The core difference between a sole trader and a company lies in their shared or separate entity value.

If you launch a company, you and your company will be separate legal entities with different Tax File Numbers (TFN) and Australian Business Numbers (ABN).

However, if you become a sole trader, you and your business will be considered a single entity. Your Tax File Number and ABN will represent both you and your business.

Let me give you some examples to make things clearer.

Sole Trader Business Structure in Australia

Many individuals who sell their services as a single individual based on their skills can become sole traders. Here are a few examples of those who may become sole traders in Australia:

  • Interior designers
  • Party planners
  • Landscape designers
  • Electricians
  • Freelance consultants
  • Carpenters
  • Mechanics

As you can tell from these examples, if you have good skills which can be sold as a service, you are eligible to become a sole trader.

But how being a sole trader might affect your business in the real world, you might be wondering.

Let me explain it to you through an example.

Example of How A Sole Trader Works

Let’s see how a sole trader business structure works. (Source: Australian Taxation Office)

So, if you are an interior designer and want to launch a business based on your skill, you can operate as a sole trader.

You’ll start by applying for an ABN which will be used for all your business dealings.
After getting your ABN, you can act as a sole trader and control and manage your interior designing business.

Being a sole trader, you’ll be responsible for the tax filing of your business, which is filed under your individual Tax File Number.

As a sole trader, all the assets, debts, and losses are your personal assets or liabilities and cannot be shared with other individuals. (This is one of the key differences between a sole trader and a company)

Working on your own, nonetheless, is not a necessity in a sole trader business. You have the legal rights to employ workers in your business.

However, you will be legally responsible for paying your employees superannuation.
Your business income will be treated as your individual income.

You’d be paying tax at the individual taxpayer’s rate but may be eligible for the small business tax offset.

Later, if your business turnover grows beyond $75,000, you will be required to register for Goods and Services Tax (GST) as per government regulations. (Source: Australian Taxation Office)

Pros and Cons of Being A Sole Trader

Pros

Cons

  • Minimum setup costs
  • No registration or annual fees
  • Simple to operate 
  • Easy tax filing
  • Doesn’t legally require a separate business bank account
  • Maximum privacy
  • Complete access to profits
  • Complete ownership, control, and management of your business
  • Minimal regulations that apply to sole traders
  • Unlimited liability to debts of your business, as you and your business are not separate entities
  • Tax planning limitations (no income splitting to save taxes)
  • Requires you to keep financial records for at least 5 years
  • Getting loans can be difficult or may mean committing your personal assets
  • Limited growth possibility
  • The life of your business is limited

(Sources: Australian Govt Business, Tasmania Govt Business).

Now, let’s have a look at how the company’s business structure works in Australia. (Source: Australian Taxation Office)

Company Business Structure in Australia

Contrary to a sole trader, a company is a legal entity in Australia that has significantly higher set-up and administration costs.

A company has the same rights as a natural person, and it can incur debt, sue, or can be sued. (Source: Australian Govt)

As an owner or member of the company, however, you will not be liable for your company’s debt.

If you plan to set up your own company instead of being a sole trader, it will have additional reporting requirements as compared to a sole trader.

Companies are regulated by the Australian Securities and Investments Commission (ASIC).

Example of How A Company Business Structure Works in Australia

If you are considering launching a bakery shop, you will essentially be launching a company.

You’ll have to apply for its registration under the Corporations Act 2001 and get its ABN. (Source: Australian Govt)

A company also needs to have a GST, if the annual turnover is more than $75,000.
You will also have to apply for its Tax File Number (TFN) and use it for filing tax returns.

A company is legally required to have a separate bank account in its name.
You will have to lodge your bakery’s annual tax return, which will show its income, deductions, and the liable income tax.

The companies usually pay their income tax in installments through Pay As You Go (PAYG) installment system.

The earnings of the bakery business will be owned by your bakery.

You cannot directly take the money out of it except through a formal distribution of profits or wages. (Source: Australian Taxation Office)

Pros and Cons of Company Business Structure

Pros

Cons

  • Limited liability 
  • Easy to transfer ownership by selling shares
  • Shareholders (often family members) can be employed by the company 
  • More favorable taxation rates
  • Access to better funds, debts, and skill base
  • Expensive to establish, maintain and terminate
  • More complex business structure to start and run
  • Requires you to understand all obligations under Corporations Act 2001
  • Business operations are owned by shareholders and run by directors
  • Your financial affairs are public
  • Annual tax returns to be paid

(Sources: Australian Govt Business, Tasmanian Govt Business)

Comparison Between Sole Trader and Company

After separately enlisting the details of sole trader and company business structures in Australia, let’s compare the two structures side by side based on various factors.
(Sources: ASIC, Australian Govt)

 

Sole Trader

Company

Setup Cost

  • Obtaining an ABN – Free
  • Registering for a business name (if required) – $39 for 1 year or $92 for 3 years
  • Obtaining an ABN – Free
  • Choosing and reserving a business name – starting from $55
  • Registering a business name –  $39 for 1 year or $92 for 3 years
  • Establishing separate bank account – bank fees may apply

Ongoing Costs

Annual costs only If you need to update your business name, otherwise no costs

  • Annual tax returns
  • Annual review fee for keeping your business registered (from $59 to $1,346 depending on type of company)
  • Surcharge fee for late submissions

Control of Business

  • Full control of your business
  • Responsible and liable for running all aspects of the business 
  • Companies are run by its directors, although you can be a sole director of you company
  • Directors have to run the company as per following obligations:
    • Act in good faith
    • Act in the best interests of the company
    • Exercise care and diligence
    • Report to and help the liquidator if the company is closing

Employing People

Both can employ staff and will be liable to following:

  • Provide workers’ compensation insurance
  • Understand tax and superannuation obligations
  • Understand your employees’ entitlements 

Record-

Keeping

  • Minimal paperwork, taxes are filed with your individual tax returns
  •  You need to keep your financial records, including tax returns, for 5 years 
  • Lodge their own tax returns
  • Keep tax records for 5 years
  • keep financial records for 7 years
  • Financial records must:
    • Record and explain transactions, financial position and performance
    • Enable preparation of financial statements 
  • You will have to show the following to an annual review by ASIC:
    • A registered officer
    • A principal place of business
    • Written record of regular company meetings 

How to Choose Between Sole Trader and Company?

If you are still undecided on what option best suits you, here are the three factors which the Australian Taxation Office recommends for consideration:

  • The tax you’re liable to pay
  • Your asset protection
  • Costs involved

Analyses the three factors in depth and choose your answers based on your real-life situation rather than your future ambitions.

We are certain that after analyzing your options in terms of these factors, you’ll be able to decide between the two logically.

Additionally, talking to a business or legal advisor is highly recommended to answer your questions and help you choose between the two.

Our Recommendation

Based on our study of the Australian Government’s regulation of various business structures, we recommend the following:

If you are the only soul who will be managing and running the operations of your business, the sole trader option suits you.

If your Small Business idea requires multiple collaborations or various skilled workers, you should consider launching a company.

In either case, these structures are forever binding. You can switch between these depending on your business evolution.

I hope this guide has brought you closer to your dream Small Business launch. Stay connected for more guides and inspiration.

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