If you want to start a business, a business structure should be something you want to think carefully about, as it will significantly affect the burdens, problems, and responsibilities you will face in the future. Learn which business structure is best for you by knowing the difference between a sole trader and a company.
What Is a Sole Trader?
A sole trader is an individual who owns and runs their own business. It has a straightforward structure: you, as a business owner and the people you hire as staff and employees:
- Less cost for setting up your business. You’ll only need a business number and a business name that will cost you less than $100 that will last for three years.
- Opening a separate business bank account is optional.
- Less cost for keeping your business running for years
- Record keeping is straightforward.
- If you need to close your business, you only have to cancel your business name and number within 28 days after you stop operating.
- Your profit is your income.
- Your business, your rules
- You are liable for all the problems, debts, and issues that will occur.
- Paying your tax can be costly.
What Is a Company?
A company has a more complex business structure than a sole trader, which commonly has a separate entity from its owner. It has one director, typically the owner, or several of them.
- The company is liable for all the problems, debts, and issues that will occur. If you have to pay debts, you can sell company assets and properties, not your personal belongings.
- More people can be involved in the decision-making if you are one of many directors in your company.
- You will have to pay a higher tax when you are earning a large amount of profit.
- A separate bank account is mandatory.
- The business income is a company income.
- Record keeping is more complicated. You will have to record taxes and tax returns and keep the financial records for seven years.
- If your company has multiple directors, you must involve the other directors in decision-making.
- Because of the complexity of a company’s business structure, the fees and costs involved in running it are several times higher than it is as a sole trader.
Setting up your company may cost you a hefty fee. Besides the cost involved in registering your company’s business name, you must also register your company and make a reservation for its name, which will cost you less than $600.
Sole Trader vs Company Tax
Although being a sole trader has several perks on the cost of setting up or keeping your business name registered, it doesn’t mean your tax burden will be lighter than when you are running a company.
Although you can enjoy a tax-free benefit on your first $18,200, you will have to start to pay your dues beyond that. The marginal tax rate for an individual income is expensive, mainly if you include the Medicare Levy.
Meanwhile, if you have a company with a Base Rate Entity, your tax rate is only 25% if you earn less than $25 million.
When Should a Sole Trader Become a Company
If your business has grown and you earn more than six figures, it’s time to upgrade your structure from a sole trader to a company. It will help you make use of the lower tax rate mentioned earlier.
Another reason is that if you are hiring employees, they generally prefer working in companies rather than as sole traders.
Contact us if you still need to decide which business structure is right for you. We offer a free consultation to discuss your unique situation and give our expert opinion on which business structure will fit you best. Schedule a call today, and let us help you get started on the path to success.