Sole trader vs. company: What are the key differences

You may have heard the of the different structures of sole trader and company been talked about and you won’t be alone in wondering what the main differences are between the two. We delve a bit deeper and share the nitty gritty of understanding these two common business structures.

What is a sole trader business structure?

Business.gov.au define a sole trader business as:

 “A sole trader is the simplest form of business structure and is relatively easy and inexpensive to set up.

As a sole trader you’re legally responsible for all aspects of your business including any debts and losses and day-to-day business decisions”. [i]

Sole trader structure advantages and disadvantages

We weigh up some of the pros and cons of the sole trader business structure:

Advantages

• Being your own boss means that’s you have total control of the ownership and management of your business. This means you have the freedom to control the main decisions of your business without the interference of business partners and others.
• Cha-ching! Any profits that your business makes are yours to keep after tax and any money gained after tax like if you sell the business
• Reporting is a lot easier with a sole trader structure. Your requirements are minimal compared to other business structures like companies for example
• When it comes to tax time, your tax losses could potentially be offset again other income earnt- this is something your tax agent or accountant will be able to help you out with

Disadvantages

• Without the financial backing and support of say a business partner for example, your potential to grow the business may be limited
• When needing extra funds to assist your business you may need to look at business loans and funding from financial providers like your bank. This can be costly with interest being charged.
• There is also a lack of flexibility when it comes to tax time being a sole trader. All of your income tax is treated as your personal income, meaning there is no access to flat tax rates that companies may be entitled to.

What is a company structure?

A company compromises of existing as a separate legal entity unlike the structures like that of a sole trader or partnership. A company is entitled to the same rights as a person meaning they can still incur debt, sue and be sued.

When you are a member of a company you are not personally liable for the company’s debts. This can change however if you are the directors of the company, where you may be personally liable if you have breached your legal requirements and obligations.

Company structure advantages and disadvantages

These are some of the pros and cons of a company business structure:

Advantages

• Shareholder liability is limited
• You can employ shareholders as employees of the company, this can sometimes be family members
• You can trade anywhere in Australia
• Easier to access more capital to help build and grow your business

Disadvantages

• The process of setting up and establishing a company business in Australia can take time and be expensive compared to other types of business structures
• The reporting process for companies is involved and requires regular information to be sent to the appropriate reporting bodies
• The company profits distributed to the shareholders is taxable

Key differences between a sole trader and company structures

The process of setting up the structures

Setting up a sole trader business is pretty straight-forward and usually only requires obtaining your Australian Business Number (ABN), however there is a bit more involved when it comes to companies. A company set up process may also require getting an Australian Company Number (ACN) and registering with ASIC.

While most businesses keep their personal and business banking separate, it is mandatory for company business structures to keep business banking separated.

Ongoing costs

As a small business you already know that the costs of running a business are never ending. One of the big differences between the sole trader and company structures involves the costs that are required to keep them running.

Sole trader businesses as we have already established involve a lot less when it comes to the set up and ongoing costs of keeping the structure going. A company will involve a few more expenses like the registering the company, reporting costs, and when required the assistance of professional serves like accountants to deal with complex business matters.

Room to grow

We’ve previously touched on this topic, but a massive difference between the two types of structures relates to opportunities to grow the business. A company has more financial support and backing than that of a sole trader. This can limit the growth and options for sole traders who may be looking to expand the business.

That’s a wrap

While there may be plenty to consider when it comes to which structure is going to suit your business best, it is always wise to consultant the advice of professionals when making major decisions about your business. Both structures offer their advantages and disadvantages and will suit certain types of businesses better than others.

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