Choosing between Sole Trader and Company structures: key differences for business owners

If 2023 has been transformational for you and your business and you may be thinking of changing from a sole trader to a company, read on!

It’s important you understand what your reporting, tax and legal obligations are. I've compiled below the major differences to help you decide which business structure is right for you. There are also other business structures, such as a partnership or a family trust. However I will be solely be focusing on comparing Sole Trader vs Company structures in this article.

	​Sole Trader	Company
Tax Implications	Simplicity is your ally: as a sole trader, taxation is simple. You report your business income as part of your personal tax return using a separate business and professional items schedule – as such, you don’t need to lodge a separate tax return for your business. You can claim deductions for expenses incurred in running your business. There are tax incentives for small businesses such as the instant asset write-off, that you may be eligible for. However personal tax rate may not help. As you earn more, the tax bite may be more pronounced.	Corporate tax advantage: companies benefit from lower corporate tax rates, offering potential savings compared to personal tax rates. A company is required to report business income in a company tax return. You can claim deductions for expenses incurred in running your business. The tax incentives for companies such as the loss carry-back tax offsets, are advantageous. Tax planning for companies can be complex with the ever-changing tax legislation.
Asset Protection:	Low: You are personally liable for tax or financial debts as a sole trader. There is no division between business assets or personal assets (including your share of joint assets such as properties or cars). Assets in your name can be used to clear business debts.	High: The company is generally liable for all business debts. However, you personal assets can also be at risk if the company can't pay its debts. As a director, you have obligations to pay for pay as you go (PAYG) withholding and superannuation debts. Even when you cease as a director, you are liable for the period you were a director. A company can own properties or assets. The company may sell these assets to help clear its debts.
Costs	Low: Setup costs are budget-friendly. There are minimal paperwork involved. Costs may include: obtaining an Australian Business Number (ABN) registering a business name (optional) opening a separate business bank account (optional) You will also incur a yearly fee to lodge your personal tax return.	Medium to High: the business structure is more complex, and has higher set-up costs. Costs may include: obtaining an Australian Business Number (ABN) and Tax File Number (TFN) choosing and reserving a company name registering your company with ASIC registering a business name (optional) opening a company bank account (mandatory) You will also incur a yearly fee to maintain your ASIC records and to lodge your company tax return and your personal tax return.
Assessing money from your bank	You can withdraw money from your business bank account.	As a director, the company may pay you directors’ fees or a salary, but you cannot draw money from the company as personal drawings. You may also receive money via dividends loans or shares.
Employing people	Both sole trader and company structures can employ staff. In either instance, you will need to: provide Workcover understand your withholding tax and superannuation obligations understand your employees’ entitlements.	Specifically in a company structure, directors have a legal responsibility to ensure the company pays for pay as you go (PAYG) withholding tax and superannuation guarantee charges.
Winding up	You need to cancel your business name and ABN within 28 days of ceasing trading.	It's more complex than just ceasing trading. A company requires to be formally deregistered from ASIC so that it ceases to exist as a legal entity.

Consider your business goals, risk appetite, and long-term vision. If you are interested in discussing your business structure, I invite you to reach out to Nicole Tru from Tru Advisory!