What Business Structure Should You Choose? Sole Trader vs. Company
Davie Mach
Founder of Box Advisory Services | Partner of the Year and Firm of the Year | Co-Host of Level: Asian
Should you start your contractor business as a sole trader or a company?
In a nutshell, sole trader structures are cheap and easy to set up but are riskier as the owner will be personally liable for the business. Companies are slightly more expensive but offer better protection, less risk and more flexibility in terms of tax purposes. If you intend on growth, a company structure may be more ideal for you.
This is a detailed guide explaining the differences between operating the business as a sole trader or through a “Pty Ltd” company. Although this summarises both structures, you should speak to your accountant to work out what the best structure is for your contracting business.
Setup and Costs
Sole Trader: Obtaining an Australian Business Number (ABN) – free. Business name registration (if applicable) – one year ($34) or three years ($79). Separate business bank accounts (recommended, but not compulsory) – bank fees may apply.
Company: Obtaining an Australian Business Number (ABN) –free. Company registration - $900 (plus GST) for a proprietary limited company.
Must have a separate business bank account – bank fees may apply.
Taxation
Sole Traders are taxed as an individual. Report your business income in your individual tax return.The 2018-19 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.
The highest marginal tax rate is at 49% (including Medicare levy & temporary budget repair levy)
Companies are taxed as a separate entity. Report company income in the company tax return.There is no tax-free threshold for companies.
The company tax rate for 2018-19 is 27.5%.
As a director, you need to report any income you earn from the company or other sources in an income tax return. You may also need to lodge a fringe benefits tax (FBT) return if you receive fringe benefits.
Ongoing Cost & Admin
A sole trader is a simple business structure so it generally has less paperwork and lower ongoing costs.Paperwork:
Business income and expenses go in your individual tax return using a separate business schedule – you do not need to lodge a separate return for your business. Business name registration (not compulsory) – one year ($34) or three years ($79).
A company is a more complex business structure so it generally has more paperwork and potentially higher ongoing costs.Paperwork:
The company must lodge its own tax return in addition to your individual return and is subject to annual review by the Australian Securities and Investments Commission (ASIC). Annual review fee – proprietary company $246.
Income
Sole Trader: The money you earn is treated as your individual income.
You can claim deductions for costs incurred in running your business.
You can withdraw money from a business bank account (separate business bank accounts are recommended, but not compulsory).
Company: Money earned by the company belongs to the company.
A separate business bank account is mandatory for a company.
As a director, the company may pay you wages or directors’ fees. You may also receive money via shares, dividends or loans.
Liability of Debt
Sole Trader: You are. Sole traders are personally liable for financial or tax debts.
There is no division between business assets or personal assets, (including your share of joint assets e.g. house or car). Assets in your name can be used to pay business debts.
Company: The company is generally liable for all business debts. As a director, you are personally liable for the tax debts of the company.
Employment
Sole Trader: Yes, you can employ staff as a sole trader business structure.
You will require workers’ compensation insurance when you employ staff.
Company: Yes, you can employ staff under the company business structure.
The company will require workers’ compensation insurance.
Other
Sole Trader: Once the sole trader dies, the business will end.
Company: The business can still run after the death of the director with the benefit of perpetual succession
Disclaimer:
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.