When starting a new business in Australia, one of the first and most crucial decisions you'll make is choosing the right business structure.  

The two most common options are operating as a sole trader or setting up a company. Trusts are also a very good structure for the right situation but we will not discuss them in this comparison of trading structures.  

Each structure has its own set of advantages and disadvantages, legal implications, and tax considerations.  

In this blog, we will explore these differences to help you make an informed decision. 

Sole Trader 

What is a Sole Trader? 

A sole trader is an individual who owns and operates their business in their own right. This is the simplest and most straightforward business structure, sometimes the preferred option if someone thinks they will be a small-scale operation. 

Advantages of Being a Sole Trader 

• Ease of Setup: Establishing a sole proprietorship is relatively easy and cost-effective. There are fewer formalities and legal requirements compared to setting up a company. In Australia, you simply need to register for an Australian Business Number (ABN) and, if applicable, Goods and Services Tax (GST). 

• Full Control: As a sole trader, you have complete control over all business decisions. This allows for quick decision-making and operational flexibility. 

• Profit Retention: All the profits generated by the business belong to you.  

• Simple Taxation: Taxation for sole traders is sometimes more straightforward. Business income is treated as personal income and you report your business income in your individual tax return. 

Disadvantages of Being a Sole Trader 

• Unlimited liability: One of the biggest drawbacks is that you are personally liable for all business debts and obligations. This means personal assets are at risk if the business fails or incurs significant liabilities. 

• Limited growth potential: Sole traders may find it challenging to raise capital for expansion, as they cannot issue shares or attract investors in the same way companies can. 

• Workload and stress: Being solely responsible for all aspects of the business can be overwhelming. It requires wearing multiple hats and can lead to burnout. 

• Higher Taxes: You have no ability to leave profits in the business and be taxed at only 25%. If you have high profits you will potentially be taxed at the highest marginal tax rate.  
  

Company 

What is a Company? 

A company is a legal entity that is separate from its owners (shareholders). It can enter into contracts, own property, and be sued independently of its owners. In Australia, companies are regulated by the Australian Securities and Investments Commission (ASIC) and must comply with the Corporations Act 2001. 

Advantages of a Company 

• Limited liability: One of the most significant advantages is limited liability. Shareholders are only liable for the amount they have invested in the company, protecting personal assets from business debts and legal actions. 

• Access to capital: Companies have greater access to funding opportunities. They can issue shares, attract investors, and secure loans more easily than sole traders. 

• Perpetual succession: Companies have an unlimited lifespan, meaning they continue to exist even if ownership changes. This provides stability and continuity. 

• Tax benefits: Companies in Australia benefit from a flat corporate tax rate, which can be lower than personal income tax rates. Small businesses with an aggregated turnover of less than $50 million pay a reduced company tax rate. 

Disadvantages of a Company 

• Complex setup and compliance: Setting up a company involves more time, effort, and cost. There are strict regulatory requirements and ongoing compliance obligations, such as annual reporting, audits, and paying annual ASIC fees. 

• Reduced control: Ownership and management are often separate in a company. This means you may need to share decision-making power with other directors and shareholders. 

• Profit sharing: Profits need to be distributed among shareholders, which can reduce the amount of income available to individual owners compared to a sole trader structure. 

Real-World Perspective: Sole Trader vs Company  

Consider the stories of Jane and Kate, both hairdressers who started their own businesses. 

Jane is a sole trader. During COVID, she took out a business loan to help build a website and create an online store to sell her products. Since then, she has struggled to pay back the loan and is finding herself in financial trouble. Because she is a sole trader, that loan becomes her personal responsibility, and all her personal assets are at risk. 

Kate, on the other hand, is the director of her company. If she took out a business loan during COVID and couldn’t pay it back, her company would be liable for this debt, not her personally. While she still needs to put certain protections in place for her personal assets, Kate is a few steps closer to sleeping better at night knowing her future is safer. 

Key Considerations: Sole Trader vs Company  

When deciding between a sole trader and a company, consider the following factors: 

• Nature of the Business: The complexity and scale of your business may influence your choice. Simple, low-risk businesses may be well-suited to sole trading, while more complex or high-growth businesses might benefit from the company structure. 

• Risk Tolerance: If protecting personal assets is a priority, a company with limited liability may be preferable. 

• Growth Plans: If you plan to scale your business and attract investors, the company structure offers more flexibility and opportunities for raising capital. 

• Tax Implications: Consult with a tax advisor to understand the tax advantages and obligations associated with each structure. In Australia, the corporate tax rate and personal income tax rates can significantly impact your decision. 
  

Final thoughts  

Choosing the right business structure is a critical decision that can impact your business's success and your personal financial security.  

While a sole trader setup offers simplicity and control, it comes with significant personal risk. Conversely, forming a company provides limited liability and growth opportunities but involves more complexity and shared control.  

Carefully weigh the advantages and disadvantages of each option in relation to your business goals and personal circumstances to make the best choice for your entrepreneurial journey. 

For peace of mind and better protection of your personal wealth, the bottom line is clear: if you own a business, register as a company. The paperwork is less stressful than potentially losing everything you own. 

If you want to learn more aboutSole Trader vs Company, you can watch our video here. 

Disclaimer 

This is general advice. 

You will need to take specialist advice that takes account of your own personal circumstances.