Sole Trader vs Company: Understanding the Top Differences

Deciding whether to run your business as a sole trader or a company can feel tricky because both have positives and negatives. Every business is different, so the best choice depends on things like how big you want your business to grow, how you’ll handle taxes, and how you plan to run it day-to-day.

Many people start as sole traders because it’s simpler and more straightforward. However, as their business grows and they begin to earn more, they often start considering the potential benefits of switching to a company structure, especially when it comes to taxes.

One big difference between sole trader vs company is how they deal with taxes. The way each is taxed can change how much money your business keeps. In this blog, we’ll look at the good and bad sides of being a sole trader or running a company. We’ll also talk about how the tax rules work for each and what this means in Australia. Whether you’re choosing between having an ABN as a sole trader or starting a company like a PTY Ltd, this will help you decide. By the end, you’ll know which option could be better for your business now and in the future.

What is a Sole Trader?

A sole trader is someone who runs their own business by themselves. They are in charge of everything, like managing daily tasks and making big decisions for the future. Being a sole trader means you have full control, but it also has risks. There’s no difference between you and your business in the eyes of the law. This means if your business owes money or gets into trouble, you might have to use your own things, like your house or savings, to fix it.

Advantages of Being a Sole Trader:

• Easy and cheap to start a business
• Only need to fill out one tax form each year
• You are the only boss and make all the choices
• Good for small businesses that don’t make much money
• No need to pay for worker insurance if you don’t hire anyone
• You don’t have to save extra super money from what you earn

Disadvantages of Operating as a Sole Trader:

• Your stuff, like your house or savings, could be used to pay business debts.
• You don’t have as many ways to save on taxes compared to a company.
• High-income businesses might pay more tax as a sole trader.
• It can be harder to keep really good workers.
• You can’t grow the business by adding partners or co-founders.
• The business stops if you retire or pass away.

What is a Pty Ltd Company?

A proprietary limited company (Pty Ltd) is a business type in Australia. It has some big advantages over being a sole trader. In a Pty Ltd company, the business is its own thing, separate from the people who run it. This means the company can sign deals, own buildings, or even go to court under its own name. The best part? If the company has debts, the owners don’t have to lose their personal stuff, like their house or savings, to pay them back. Their personal things are protected.

A Pty Ltd company keeps your personal stuff safer and gives you more ways to save on taxes compared to being a sole trader, but it costs more to set up and manage. To start a company, you need to pay fees, do extra paperwork, and follow more rules. Even though it costs more, lots of businesses think it’s a good idea because they can get tax breaks and it’s easier to find people to invest money in their business.

A Pty Ltd company pays a fixed tax rate of 30%. This can be better than the higher personal tax rates that sole traders often have to pay. With this setup, companies can plan and save on taxes in ways that sole traders can’t. They have more options to lower how much tax they owe.

Advantages of Running a Pty Ltd Company:

• A Pty Ltd company protects your personal stuff, like your house or money, if the business gets into debt.
• It helps you save on taxes because companies have special tax rules.
• You can hire people who also own shares in the company and get more money for the business from investors.
• You can sell shares to pass the business to someone else without closing it.
• The company has a flat tax rate of 30%, which can be lower than what sole traders pay.

Disadvantages of Running a Pty Ltd Company:

• A Pty Ltd company costs more to start and run compared to being a sole trader.
• You have to do extra tax work, like filing separate tax forms, which takes more time.
• If you close the company, it can take a long time and cost a lot of money.
• When the company shares profits (called dividends) with its owners, they have to pay tax on that money too.

Sole Trader vs Company: Key Differences

Here’s a of Sole Trader and Company difference based on several key aspects essential to weigh the various factors, including set-up costs, tax implications, and bus:

1. Initial Setup Costs

Sole Trader:

• Low Costs: It’s very cheap to start. You don’t have to register with special groups like ASIC or get a Company Number (ACN).
• Free ABN: You just need to apply for an Australian Business Number (ABN), and it doesn’t cost anything.
• Bank Account: It’s a good idea to open a separate bank account just for your business, but you don’t have to if you don’t want to.

Company (Proprietary Limited):

• Registration Fees: To register a company, you need to pay around $597 (as of 2024). Once registered, you get a special number called an Australian Company Number (ACN).
• Business Bank Account: You must open a separate bank account for your company to keep your money organised. This account may have fees for using it.

2. Record-Keeping Requirements

Sole Traders

Running your business as a sole trader in Australia is relatively simple when it comes to keeping records. Because this structure is straightforward, there’s less administrative burden.

• Tax Returns: When you’re a sole trader, you include your business income and expenses in your personal tax return. There’s no need to file a separate tax return just for your business. You do need to complete a special form called the Business and Professional Items Schedule. This form helps the government see how much money your business makes and spends.
• Duration of Record Keeping: You must save all your financial records, like tax returns, for at least five years. This is important in case the tax office needs to check your records or ask any questions. Keeping things like receipts, invoices, and tax forms in one place helps you stay on top of everything.
• Reporting Changes: If something changes, like your business address or phone number, you need to let the right people know. You have 28 days to tell them about these changes. Keeping your information up-to-date helps avoid problems and ensures you don’t miss important messages about your business.

Companies

Running a company, like a Pty Ltd, means there’s extra paperwork to do. This includes detailed records and reports about your business. You also need to follow certain rules all the time, like regular updates to the authorities:

• Tax Returns: A company is required to lodge its own corporate tax return. This is separate from the tax return of the business owners.
• Duration of Record Keeping: Companies must keep their tax records for at least five years and their financial records for seven years to comply with the Corporations Act 2001.
• Detailed Financial Records: Companies need to keep detailed records of all the money coming in and going out. These records should clearly show every transaction, like who paid you or who you paid. The information from these records is used to make financial return statements. These are reports that show how your company is doing and may need to be checked by an auditor.
• Ongoing Compliance: A company must go through an annual review by ASIC (Australian Securities and Investments Commission). This review checks that all your company details, like your address and who runs the company, are correct. It helps keep your company’s records accurate and stops problems from happening later.
• Corporate Requirements: Companies must follow some rules to obey the law. They need a registered officer, a main business address, and regular meetings to make company decisions. Decisions made in meetings must be written down to keep records clear.

If something changes, like a new owner or new directors, companies must tell the government within 28 days. This helps keep everything updated and correct.

3. Simplicity of Starting as a Sole Trader

To start as a sole trader in Australia, you need an Australian Business Number (ABN). This number helps with taxes and lets the government know about your business.

• If you don’t use your own name for your business, you must register a business name. This gives your business a professional look. If you stick to your own name, you don’t need to register.
• Business Bank Account: Sole traders don’t have to open a separate business bank account, but it’s a good idea. It helps you keep track of your business money, like income and expenses, more easily.

To set up a company in Australia, you need an Australian Company Number (ACN). You get this by registering with the Australian Securities and Investments Commission (ASIC). This number is important for running your business legally.

• Just like sole traders, companies need an Australian Business Number (ABN) to operate and pay taxes.
• If your company won’t use its legal name, you must register a business name.
• Unlike sole traders, companies must have their own business bank account. This is a legal rule to keep business and personal money separate.

If your business will earn $75,000 or more in its first year, you must register for Goods and Services Tax (GST). This applies to both sole traders and companies. It’s important to do this to follow Australian tax laws.

4. Business Revenue Handling

For sole traders, the money their business earns is counted as their personal income by the Australian Taxation Office (ATO). This means they keep the profits but must pay taxes on that income themselves.

• Deductions: Business owners can claim deductions for costs that help run their business. This includes things like supplies, equipment, and travel for work.
• Withdrawals: Sole traders can take money from their business bank account for personal use. This is because the business income is treated as their personal income.

Being a sole trader is simple and flexible, especially when starting out. But as your income grows, you might pay more in taxes. Companies, on the other hand, can have lower tax rates if they earn a lot.

When a business operates as a company, the money it earns belongs to the company, not to you personally. Even if you own shares in the company, the profits are kept separate from your personal income.

• Business Bank Account: A company must have its own business bank account. This keeps the company’s money separate from personal money, which is required by law and helps keep financial records clear.
• Director’s Role: If you’re a director of a company, you can be paid wages or fees for your work. Unlike a sole trader, you can’t just take money out of the company. Any money you get must be paid as wages or dividends, and you’ll need to pay tax on it.
• Tax Return: If you get money from a company, like a salary or dividends, you have to include it on your personal tax return.

With a company, you can be paid as an employee, but you can’t take money from the business like a sole trader. Instead, you need to follow formal steps to get paid through a salary or dividends. This setup can help with tax planning and might mean lower taxes for some people.

5. Costs for Setting Up, Operating, and Accounting for Companies

Sole Traders

Setting up as a sole trader in Australia is relatively inexpensive. Here’s what you’ll need to get started:

• ABN (Australian Business Number): Applying for an ABN is free.
• Business Name Registration: If you want to trade under a name other than your own, you’ll need to register a business name. This costs: $44 for 1 year, $102 for 3 years
• Business Bank Account: It’s a good idea for sole traders in Australia to have a separate bank account just for their business. This helps keep track of business money and personal money. Some banks may charge fees for these accounts, so it’s worth checking with them first.

Being a sole trader in Australia costs less than running a company. After you set up, you only need to register your business and keep your records tidy. It’s simpler and cheaper!

Companies

Setting up a company involves more steps and higher costs. Here’s what’s involved:

• Company Name Reservation: If you want to reserve a specific company name in Australia, it can cost $61. This means you can make sure no one else uses the name you’ve chosen for your company.
• Company Registration: Registering a company in Australia costs between $474 and $576. The exact cost depends on the type of company you want to set up, like a Pty Ltd company.
• Business Bank Account: Companies in Australia are required to have a separate bank account for their business. This makes it easier to manage the company’s money. Some banks may charge fees for these accounts, so it’s a good idea to check first.

Because a company has more formal requirements, it costs more to set up initially.

6. Liability for Business Debts

Liability for Sole Traders

As a sole trader, you are personally liable for any debts your business incurs. This means:

• Business Debts: As a sole trader in Australia, there’s no difference between your personal and business assets. If your business owes money, like loans or tax debts, you are responsible for paying it back yourself. This means your personal money and belongings could be used to cover the debt.
• Personal Assets: As a sole trader in Australia, there’s no legal difference between you and your business. This means if your business can’t pay its debts, your personal things—like your home, car, or savings—could be taken to pay what’s owed.
• Tax Debts: If you’re a sole trader in Australia, you are responsible for your business’s debts. If your business has tax problems or can’t pay its bills, you have to pay using your own money or belongings.

This makes the sole trader vs company structure riskier, especially as your business grows. The upside is that it’s simpler and cheaper to set up, but the downside is that your personal assets are at risk if things go wrong.

Liability for Companies

With a company structure, the situation is a bit different:

• Business Debts: A company in Australia is responsible for paying its own debts. This means the company, not the people who own or manage it, has to settle what it owes. The owners and managers usually don’t have to use their own money or belongings to pay the company’s debts.
• Personal Assets: If a company in Australia owes money, directors don’t have to pay with their own money. But, if the company can’t pay and a director hasn’t done their job properly, they might lose some of their own money or belongings.
• Director’s Liabilities: If you’re a director in Australia, you must pay some debts like PAYG tax and superannuation. Even after you stop being a director, you’re still responsible for debts from when you were in charge.
• Company Assets: A company in Australia can own things like property owner or other assets. These belong to the company, not to the people who own or run it, like shareholders or directors. If the company owes money, it can sell its assets to pay off the debt. The personal belongings of the directors aren’t used to cover the company’s debts.

A company structure in Australia protects directors from being personally responsible for most company debts. But directors still have certain financial duties. They must make sure taxes like PAYG and superannuation payments are made. If these aren’t paid, directors can be held responsible.

7. Control vs. Liability for Sole Traders

Sole Trader: More Control, More Responsibility

A sole trader in Australia runs their business on their own. They make all the decisions, like how the business works each day and what big plans to follow. They can also take money out of the business whenever they need it.

• Control: Being a sole trader in Australia means you’re the only person making decisions for your business. This gives you lots of freedom to choose how things are done and flexibility to run the business your way.
• Liability: On the downside, you are personally responsible for any debts or losses your business incurs. This means that if your business faces financial trouble, your personal assets (like your house, car, or savings) could be at risk.

When you’re starting a business in Australia, being a sole trader can mean paying less tax at first. But it also comes with more risk because you’re personally responsible for all the business debts. If things go wrong, you might have to use your own money to fix it.

Company: Less Control, Limited Liability

The amount of control you have in an Australian company depends on your role. If you are the only director, you have a lot of control over how things are run. But some big decisions, like changes to the company’s rules, need to be agreed upon through a formal process called a company resolution.

• Control: In a company, big decisions must be approved by others, like shareholders or directors. This makes it slower and less flexible. A sole trader can decide everything alone, which is quicker and easier.
• Liability: A company is usually responsible for its debts, so your personal things, like your house, are safe. But if you’re a director and the company doesn’t pay taxes or superannuation, you might still have to pay.

In a company, the money it earns belongs to the company, not to you. You can get paid a salary, wages, or dividends from the company, but you can’t just take money out for yourself like a sole trader can.

8. Taxation of Sole Traders as Individuals

Taxation for Sole Traders

As a sole trader, your business income is treated as part of your personal income. Here’s how it works:

• If you’re a sole trader in Australia, you report your business income in your personal tax return.
• You use your individual tax file number (TFN) to do this.
• The money you earn from your business is taxed the same way as your personal income. This means the more you earn, the higher your tax rate might be.

Being a sole trader in Australia is simple and works well for small businesses. You report your business income with your personal income and pay tax at personal income tax rates. But as your income grows, you might pay more tax because higher earnings mean a higher tax rate. This setup is good at first, but it might not be as helpful if your business makes a lot more money later.

Taxation for Companies

In contrast, companies face a different tax structure:

• Company Tax Return: A company in Australia has to file its own tax return every year. This is different from the director’s personal tax return, which is done separately.
• Company Tax Rate: Companies in Australia pay tax on the money they make, called profits. The tax rate is usually 30%, but small businesses that meet certain rules might only pay 25%.
• Dividends and Earnings: If you’re a shareholder or director in Australia, you still need to file your own personal tax return. If you get dividends or earnings from the company, you’ll pay tax on them at your own personal tax rate.

For businesses that make a lot of money, the company tax structure can be better. This is because companies pay a lower tax rate on their profits compared to the higher tax rates that individuals pay when they earn more.

9. Insurance Considerations

Insurance for Sole Traders

As a sole trader, you’re personally responsible for your business activities. This means you need to arrange your own insurance coverage.

• Personal Insurance: If you’re a sole trader in Australia, you don’t get workers’ compensation. This means if you get hurt or sick while working, you won’t be automatically protected. It’s smart to get your own insurance to stay safe.
• Business Insurance: Different businesses need different insurance based on what they do. For example, if your business deals with customers, public liability insurance can help in case someone gets hurt or something gets damaged.
• Workers’ Compensation: If a business has no employees, it doesn’t need workers’ compensation insurance. But if it does, this insurance helps protect workers if they get hurt.

If you’re a sole trader, you need to get your own insurance. Without the right insurance, your personal things, like your house or car, could be at risk.

Insurance for Companies

A company has a few different insurance needs compared to a sole trader:

• Workers’ Compensation: If a business has employees, it must have workers’ compensation insurance. This helps if workers get hurt while doing their job.
• Directors and Officers Liability Insurance: This insurance is optional but good for company directors. It helps protect them if they are sued for choices they make while managing the company.
• Liability for WorkCover Claims: Company directors are not personally responsible if someone gets hurt at work. The company handles workers’ compensation claims, not the directors.

10. Access to Bank Funds

Sole Trader: More Flexibility

As a sole trader, you have more flexibility when it comes to accessing money:

• Personal Drawings: You can take money from your business account anytime as personal drawings. The money your business makes is yours to use.
• Business Bank Account: While it’s not a requirement, it’s recommended to have a separate business bank account to help you keep track of your business finances. This makes managing your income and expenses easier during tax time.

If you’re a sole trader, you control all the money your business makes. But keep business money and personal money separate to stay organised.

Company: More Structure and Rules

In a company, the rules around accessing money are stricter:

• Business Bank Account: A company must have its own business bank account. The company’s money is kept separate from your personal money.
• Salary and Wages: As a company director, you can get paid a salary, wages, or director’s fees. But you cannot take money from the business as personal drawings like a sole trader.
• Dividends and Shares: You can get money from a company as dividends or through shareholder loans. Any money you take out must be recorded and taxed properly.

11. Business Control and Decision-Making

Control as a Sole Trader

As a sole trader, you have complete authority over all aspects of your business.

• Decision-Making: You make all the decisions for the business. This includes daily tasks and big future plans.
• Responsibility: Being in control means you handle everything. You manage risks, money, and legal duties. You are also responsible for your business’s debts and actions.

This gives you freedom and flexibility but also means you’re fully responsible for your business’s success or failure.

Control as a Company

In a company, control depends on the structure and who is involved:

• Sole Director: Even if you are the only director, you have lots of control over the company. But some decisions must be written down as resolutions to follow the rules.
• Multiple Directors: If there is more than one director, they share control of the company. All directors must follow the company’s rules or constitution.
• Director’s Duties: As a director, you have important jobs. You must act honestly and do what is best for the company. Make careful decisions. Stop the company from doing business if it can’t pay its debts. If the company is closing, you need to help with that process.

These rules help protect the company and keep it running responsibly. Directors still have control but must follow these rules. This makes their decisions more organised than a sole trader’s.

12. Ongoing Operational Costs

Ongoing Costs for Sole Traders

As a sole trader, your ongoing costs are relatively simple and straightforward:

• Business Name Renewal: If you register a business name, you must renew it regularly. The cost is $44 for one year or $102 for three years.
• ABN Costs: You don’t have to pay to keep your ABN. There are no extra costs unless you need to register for GST or follow other business rules.

Ongoing Costs for Companies

In a company structure, the ongoing costs are a bit more involved:

• Annual Review Fee: Every year, a company must have an annual review. ASIC will send a statement and an invoice for the review fee. This fee is usually about $310 for a Pty Ltd company.
• Company Filings and Compliance: Companies must keep records, file tax returns, and follow extra rules. This can make accounting and legal costs go up.

13. Process of Closing a Business

Closing a Sole Trader Business

If you decide to close your sole trader business, the process is pretty straightforward:

• Cancel Your ABN: You need to cancel your ABN when you stop running your business.
• Cancel Your Business Name: If you registered a business name, you must cancel it within 28 days after you stop your business.

This process is relatively simple and doesn’t involve too much paperwork or complexity.

Closing a Company

For a company, the process is a bit more involved:

• Deregistering the Company: Closing a company is not just about stopping trading. You must formally deregister it with ASIC to end it as a legal entity.
• Clear Outstanding Debts: Before deregistering a company, all debts must be paid. You also need to meet any legal requirements, like paying creditors.
• Final Tax Returns: A company must lodge its final tax return before it can be deregistered.

14. Hiring Employees

Employing People as a Sole Trader

As a sole trader, you can employ people, but you’ll need to take on the following responsibilities:

• Workers’ Compensation Insurance: You must have workers’ compensation insurance to protect employees if they get hurt at work.
• Tax and Superannuation Obligations: As an employer, you need to know your tax and super duties. This includes PAYG withholding and paying super for your employees.
• Employee Entitlements: You must know your employees’ entitlements. This includes sick leave, holiday leave, and other benefits.

Employing People as a Company

As a company, you also have to follow the same basic requirements, but there are a few more formalities to keep in mind:

• Workers’ Compensation Insurance: Like a sole trader, your company must provide workers’ compensation insurance if you have employees.
• Tax and Superannuation: Your company must handle PAYG withholding, pay super for employees, and follow other tax rules.
• Employee Entitlements: You must track and manage your employees’ entitlements. This includes leave and other benefits, as required by employment law.

When Should a Sole Trader Consider Transitioning to a Company?

There are several key moments when a sole trader vs company transition might make sense for your business. Here are the main reasons why you might consider shifting to a company structure:

1. Increased Liability and Risk
   When your business grows, risks can increase too. This might mean more debts or legal problems. Having a company structure can help. It offers limited liability, so your personal assets stay safe.
2. Raising Capital for Expansion
   Having a company can help you raise money to grow your business. Companies can issue shares to get investors. Sole traders can’t do this.
3. Tax Benefits
   When a business makes a lot of money, company tax rates can be lower than personal tax rates. Changing to a company can help you pay less tax and make more profit. This is a big benefit when comparing sole trader and company options.
4. Business Continuity
   If you want your business to last after you’re gone, a company is a better choice. A sole trader business ends when the owner leaves. But a company can keep going and grow, even without the original owner. This makes it easier for the business to continue.

So, Which Option Is Better for You?

Choosing between sole trader vs company depends on what your business needs. Each option has its own benefits based on how big your business is and what it does. Understanding the differences can assist you in choosing the best option.

• If you’re just starting out and your business is small, being a sole trader is easier and less expensive. You also don’t need an ABN sole trader vs company comparison because you only need an ABN for a sole trader.
• If you want to grow your business, have less risk, or bring in partners or investors, a company might be better. A Pty Ltd company is one type you can choose.

To Sum Up

Choosing between a sole trader and a company depends on what your business needs and what you want in the future. A sole trader is simple, costs less, and gives you full control. But you are responsible for all debts and problems. A company gives you less risk, tax benefits, and more protection. However, it is harder to manage and has more rules to follow.

It’s important to think about the good and bad points of each option. Look at your type of business, your plans to grow, and how much risk you can handle. If you’re not sure what to do, asking experts for help is a smart idea. Sleek Australia can help with starting a business, accounting, and taxes. They offer advice and support to make things easier for you.

Choosing between a sole trader and a company is an important decision. If you switch to a company and want to change the company name, it’s important to know how to do it. This will help the change go smoothly.