Choosing a business structure might not be the most glamorous part of setting up your business, but it’s absolutely crucial. This decision will affect how much tax you pay, how much red tape you have to deal with and what happens if things take a turn for the unexpected.
You may have heard of these two business structures — sole trader and company. Each have their own pros and cons, and we’re here to help you sift through them so you can make the right choice for your business.
What is a sole trader?
A sole trader is essentially a one-person business. If you decide to become a sole trader, you call the shots. You make all the key decisions, bear all responsibilities, and yes, you get to reap all the profits after taxes.
It’s the simplest form of business structure, which is why it’s incredibly popular among freelance types, such as consultants, tradies and artists. The main appeal of a sole trader business structure is how easy it is to set up. It also gives you complete control over your business decisions.
What is a company?
Think of a company as a separate entity from yourself. It’s a business structure that’s legally distinct from its owners. That means it can own property, incur debts, and be sued independently of the people who run it.
That separation can be pretty handy, especially when it comes to handling debts and liabilities. It’s the company on the hook, not you personally. Setting up a company might involve a bit more paperwork and some upfront costs. But it gives you a robust framework for expanding your business and bringing on new partners or investors.
Pros and Cons of being a sole trader
Let’s explore the upsides that make being a sole trader appealing to many, as well as the challenges you might face.
Advantages of being a sole trader
Becoming a sole trader is about as straightforward as it gets in the business world. Once you register for an ABN, you can set up and start running your business almost immediately. Plus, managing your business is relatively uncomplicated since you’re in charge of all decisions.
Tax time tends to be just as straightforward since you’re dealing with personal income. You may even benefit from certain tax advantages like lower tax brackets or small business tax offsets depending on your earnings.
What’s more, being a sole trader means you become the face of your business. You deal directly with your customers, which can lead to stronger relationships and a more loyal customer base.
Disadvantages of being a sole trader
When you’re a sole trader, the line between your personal and business finances is non-existent. This means if your business falls into debt or faces legal issues, creditors can go after your personal assets, including your car, home, and other valuables, to recover what the business owes.
Operating as a sole trader can also sometimes put a cap on your business’s growth potential. You might find that larger companies or certain clients prefer to deal with a registered company rather than an individual. This preference can limit your access to high-value contracts and expansion opportunities.
Lastly, raising funds can be a tough hill to climb. Without the ability to sell shares or attract investors, you might find yourself limited to personal loans or using your own savings. This can significantly cap how much or how quickly your business can grow.
Pros and cons of owning a company
Now let’s consider the option of starting a company. Like being a sole trader, it comes with it’s own set of advantages and setbacks.
Advantages of starting a company
One of the benefits of forming a company is limited liability. This means your personal assets, like your home or car, are protected if your business faces financial trouble. Only the assets owned by the company are at risk. This can provide a safety net many entrepreneurs find comforting.
Companies may also have the edge with their perceived credibility. Just adding the “Pty Ltd” label can enhance your image with customers, suppliers, and potential investors, making it easier to establish trust and gain access to better opportunities.
Having a company structure also allows you to raise capital by offering shares. If you’re expanding, being able to sell shares to investors opens doors to capital that doesn’t have to involve debt.
Disadvantages of starting a company
Starting a company means dealing with a lot of red tape. The setup process is packed with legal requirements, such as registering the company, hiring accountants and ensuring compliance.
Once you’re up and running, the administrative burden doesn’t ease up. Companies are subject to rigorous regulatory standards, including record-keeping and regular audits. This level of scrutiny can be suffocating and easily distract you from the day-to-day running of the business.
Another challenge is the tax situation. Companies are taxed separately from personal income, which might sound great at first. But then you realise you’re actually being taxed twice — first on the company’s profits, and then on your income when you draw dividends from the company. You may even have to hire an expert to navigate these tax complexities, which will add to your operational costs.
Which business structure should I choose?
Deciding between becoming a sole trader or forming a company is a big decision and depends on several factors. First think about your future goals. Are you planning to keep your business small and manageable, or do you have plans to expand significantly? Your vision for the future will heavily impact the business structure you choose.
Next, consider your financial situation. Starting a company might require more upfront investment for legal and administrative costs compared to the minimal costs associated with being a sole trader. Determine whether you have the resources to cover these initial expenses without overwhelming yourself.
Lastly, how much risk can you comfortably take on? Operating as a sole trader means your personal assets could be at risk if your business runs into financial troubles. Is the extra paperwork and setup hassle worth the peace of mind?
Protect your business dreams with BizCover
As you can see, both sole trader and company business structures offer its own unique flavours and challenges. Hopefully this article has equipped you with the knowledge to make this business decision a little easier.
But whichever path you choose, remember that the structure you choose now isn’t set in stone. Many business owners start as sole traders and transition to a company as their business evolves.
No matter which business structure you end up choosing, business risks don’t discriminate. So why not add an extra layer of protection with the right business insurance?
With BizCover, you can get multiple quotes in minutes and find affordable cover that’s tailored to your needs, whether you’re a sole trader or running a company. Visit BizCover today, and join over 200,000 small businesses in Australia who trust us for a no-drama insurance experience.
This information is general only and does not take into account your objectives, financial situation or needs. It should not be relied upon as advice. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording.
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