Choosing the right structure for your business – Sole Trader vs Pty Ltd Company
Registering a Pty Ltd vs Registering as a Sole Trader – What are the key differences?
The first decision for many entrepreneurs or aspiring business owners is choosing the right legal structure for their business. This decision can be complex and requires a genuine understanding of the differences between the business structures, the responsibilities that are required for each, and how these variables will impact the ongoing operations.
In this article, we’ll aim to highlight the key differences between the two different structures and the more obvious impacts these will have on day-to-day trading of your new business.
What is a Sole Tradership?
A sole trader business structure is a person trading as the individual legally responsible for all aspects of the business. This includes any debts and losses, which can’t be shared with others. Source.
What is a Proprietary Limited Company?
A company is a separate legal entity, unlike a sole trader structure. This means the company has the same rights as a natural person, and can incur debt, sue and be sued. The company’s owners (shareholders) can limit their personal liability and are generally not liable for company debts. Proprietary Limited companies are commonly abbreviated to “Pty Ltd” Source.
What are the perceived benefits of being a Sole Trader?
- You’re the boss. And the only boss.
- You keep all the profits – no dividends or profit shares.
- Registration costs are relatively low.
- You have maximum privacy.
- Establishing and operating your business is simple.
- It’s easy to change your legal structure later if your circumstances change and
- You can easily wind up the business.
What are the perceived benefits of being a Pty Ltd business?
- When operating with a number of directors or shareholders, you will have freedom from being the sole decision maker and can access the knowledge and experience of your co-Directors.
- It’s easier to raise capital, as you have shareholders.
- It’s easy to transfer full or part ownership of the business to another individual or entity.
- Easier to expand as you can operate a group of Companies and offset losses from one Company against the profit being taxed of another.
- Perception is reality – rightly or wrongly, companies are often perceived as being more “serious” by outsiders as the process to setup and requirements for ongoing trading are more involved and costly – requiring more of a commitment from the Directors.
- Taxation on profits is advantageous (see the Taxation section below).
- Liability is limited. (see the Liability section below).
What are the fees and charges applicable to registering as a Sole Trader?
Every sole trader requires and Australian Business Number (ABN), which can be registered for free. As a Sole Trader, the business is the person – therefore a Sole Trader ABN is registered in the applicant’s name – e.g John Smith ABN 99 999 999 999. If you would like to register a Business Name to trade with -e.g John Smith trading as John’s Plumbing, ABN 99 999 999 999 – the cost to do this with ASIC is $36 for 1 year, or $84 for 3 years.
What are the fees and charges applicable to registering as a Pty Ltd Company?
Registering a company costs $488 for a Pty Ltd company. Upon completion, you will receive an Australian Company Number from ASIC, once they’ve registered your company. If you want to run your business as a company, you’re also required to apply for an ABN (free) and a separate company bank account. The company bank account may attract fees, depending on the bank and type of account you open. Companies are also required to pay annual ACN renewals, as well as any applicable ASIC fees when changes are made to the structure of the business.
What are my liabilities as a Sole Trader?
As a sole trader, your personal assets are not protected by the business structure. Because of this, you are personally liable for every part of the business, including any debts, liabilities and contracts of that business.
If you hire staff, you are also personally responsible for PAYG withholding obligations and Super Guarantee (SG) contributions obligations.
What are my liabilities within a Pty Ltd Company?
As the director of a Pty Ltd Company, your personal assets are not automatically protected, however, generally if you comply with your legal obligations as a Director, the company is liable for the Company’s debts. This means that all debt or liabilities of the company are to be paid by the company, not by you, as a Director.
As the Director of the business, if you hire staff, you are still personally responsible for PAYG Withholding and SG Contribution obligations.
What are the differences with Taxation between a Sole Trader and a Pty Ltd Company?
Sole traders have a tax-free threshold of $18,200, whereas Companies are not eligible for any tax-free threshold. When it comes to the tax rates on income, sole traders are required to pay tax at their individual income rate. For Pty Ltd Companies with an aggregate turnover of less than $10,000,000 per year, the Company tax rate is fixed, as of 1 July 2016 at 27.5%.
Sole traders will also need to lodge their normal, individual tax return each year, adding their business income and expenses into a separate schedule. For Companies, a separate Company tax return is required to be lodged annually, as well as personal tax returns for any income you earn via wages, shares, dividends, disbursements, loans received from the company, or any other sources of income.
It should be noted that Sole Traders must submit their annual tax return by 31st October of that year, whereas a Pty Ltd Company isn’t required to submit their annual tax returns until 28th February of the next year.
For more information on the Australian Taxation structure, visit this site.
As you have probably determined by now, there are a myriad of differences, advantages, and disadvantages between establishing your business as a Sole Trader or a Pty Ltd Company.
It’s always best to do the appropriate research required or engage a trusted and knowledgeable Business Advisor, Accountant or Legal counsel to help you through the journey.
Becoming an entrepreneur is exciting, empowering and at times, difficult. Ultimately, it should be a personally and financially rewarding journey to take.
The team at Finstro wishes you the best of luck and remind you that we’re here to help all types of businesses, with our smart cash flow management software and innovative business finance solutions.