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BUSINESS ADVICE •  24 FEBRUARY 2021 • 3 MIN READ

Should you class your business as a sole trader or a company?

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You’ve got some thinking to do. Evaluate the pros and cons of each of these business structure types and the right path should make itself clear.

Sole Trader

A sole trader is a person trading on their own. People who opt for this business type can usually get started without any formal or legal processes.

Pros

  • Quick and cheap (you can start trading with your own name and ABN number)
  • You’re personally entitled to all profits
  • You’re able to employ others to help run the business but you have to ensure you meet all your legal obligations when employing people
  • You control, manage, and own the business and are in charge of the day to day operations

Cons

  • You’re personally liable for business taxes, business debt, and any claims made against you. In some situations, even your home can be placed at risk
  • Profit can’t be split for tax purposes. You are taxed on individual tax rates which can be high if you earn a substantial amount of taxable income
  • Your capacity to raise capital is limited

Company

Registering as a company turns your business into a separate legal entity. Amongst the benefits, one stands out: the business assumes ownership of assets and responsibility for debt.

Pros

  • Your business gets a more commercial look and feel (it’s perceived as a sign that you can be trusted to be here for the long-term)
  • You get a degree of tax flexibility, with the option of retaining profits in the company or paying them out to shareholders
  • Your personal liability is restricted, which gives business owners some protection from creditors and other claims
  • Shareholders’ liability for losses is limited to the value of their shares in the company

Cons

  • Registering your company costs money (ranging from $443 - $538 depending on the type of company), or we can take the entire hassle out of your hands for $245 + GST)
  • Your company must produce annual financial statements and file its own tax return. All of our packages cover you for the financial statements and up to three tax returns (no matter if you’re a sole trader or trading as a company)
  • The limited personal liability of shareholders doesn’t extend to directors. If you, as a director, fail to carry out your statutory duties (they’re set in the Corporations Act), you may be personally sued for breach of duty
  • The company must file a Company Annual Statement with ASIC each year (different from a tax return to the ATO). Fees are outlined here
  • ASIC have many requirements for companies to cease operations which are listed here
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When to change from sole trader to company?

A sole trader is suitable for a personal business in the early stages of growth. But if your business continues to grow, and your annual profits start to increase into a higher tax bracket, then it's a good time to consider changing to a company structure.

You may want to bring on business partners, expand your business through franchising or opening a new business location. You can also improve commercial opportunities by taking on more investors which is difficult to do as a sole trader.

When should you not change to a company?

  • Growth of your business is limited - sometimes growth of your business just doesn’t happen so if you don’t happen to make more than $120,000 per year, it may be better to remain as a sole trader
  • If you prefer to retain complete control of your business
  • No time to take on more responsibility. A company requires more reporting and financial obligations

Who are Beany?

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant would. 

We have a dedicated team of remote accountants to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.

Kim

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