Sole Trader Versus Company: Understanding Which Business Structure You Should Choose

Are you looking to start your business and struggling to decide whether you want to adopt a sole trader or company business structure? Or are you looking to grow your business and want to invest in the right long term business structure?

Well, it’s important to know the options available to you and the differences between the key business structures in Australia. Learn more about sole trader and company business structures, and which one you should choose down below!

Understanding the sole trader business structure

A sole trader business structure is made up of one individual who is considered legally responsible for all aspects of the business. This simply means that the sole trader incurs all the debts, losses and profits of a business, and has sole control over day to day business operations and decisions.

A sole trader does not necessarily mean a one-man business, rather sole traders can still hire others to help run their business. However, in the case that they do, sole traders need to comply with legal obligations as outlined in worker’s compensation insurance policies and pay superannuation contributions to their employees. Sole traders also have the option to pay their own superannuation for their retirement.
Other key characteristics you should know about the sole trader business structure includes:

• * One person possessing unlimited liability if things go wrong. This means that their personal assets are at risk
• * The ability to use an individual tax file number (TFN) to lodge tax returns
• * Requiring a five-year financial record
• * Being generally simple to set up and operate

Due to its simplicity, sole traders are the most common business structure individuals choose to operate in Australia. A sole trader business structure is most appealing to individuals who would like to run a small business by themselves, and with a small number of employees. This way, they do not have to worry about complicated tax obligations, nor sharing responsibilities and profits with potential partners.

Understanding the company business structure

The company business structure is more complex when compared to the sole trader business structure. Under a company business structure, a business acts as its own separate legal entity, meaning it has all the rights of an individual. This includes incurring debt, earning profit, suing and being sued.

A company business structure is known for:

• * Being made up of members who are not liable for the company’s debts (however are required to pay the business unpaid shares when asked upon)
• * Being made up of directors who are held personally liable for breaches of their legal obligations should they occur
• * Requiring both members and directors to follow the Corporations Act 2001
• * Being more complex and costly than other common business structures
• * Earning and owning profits as a separate legal entity (rather than being owned by an individual)
• * Requiring an annual review.

A company business structure is much more expensive and complicated to run than a sole trader business, and hence is usually reserved for large businesses which can take advantage of its tax benefits and government incentives. A company business structure is usually transitioned into, rather than built from scratch.

Understand your business structures

Choosing the right business structure is integral to the success of your business later down the track. Not only is it important to know which business structure to start off with, it is also advisable to know the right business structure to transition into. If you are looking for more information on sole trader and company business structures, and how they may be appropriate for your business ideas and operations, be sure to speak with a business accountant.

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