Should I start as a company or a sole trader?

by | Aug 5, 2020 | Business Sellers & Purchasers, Start-Up & Expanding Businesses

Why you should have a Company Structure, not Sole Trader…

When first setting up a business, it is common to use a sole trader structure, as it is relatively easy and cheap. E.g. you are a man or woman with a van providing a service. ..Simple.
Now, because of your outstanding service you are consistently fully booked. You need to hire employees to keep up with increased demand and purchase multiple work vans etc. As your business grows, it is crucial that your business structure evolves with it.

Alternatively, you may aspire from the start to grow the business beyond just you and understand the importance of setting your business up properly from day one to protect yourself and your assets.
Wherever you sit in this journey, a company structure is by far safer than being in business as a sole trader and here is why ..

Safeguard Your Personal Liability

One of the biggest benefits gained from structuring your business as a limited company is that you can protect your personal property. As a sole trader, you are personally liable for all business debts. You can incur debt and you be sued, which means your personal assets are very much at risk. Changing to a company structure turns your business into a separate legal entity, meaning the company can sue and be sued. This limits your personal liability.

It should however be noted that a director could become personally liable if they breach their legal obligations (e.g. the company became insolvent and the director allowed continued trade). Shareholders are only financially obligated to any remaining payment of their share price, and not to company debts. Most shares in proprietary limited companies start at $1.

Securing Loans and Raising Capital

Another plus in setting up a company is that a loan can be secured using your company’s assets. This is again because your company is a separate entity. On the other hand, a sole trader must use personal assets as a security, such as their home. In some cases, directors of a company will need to provide a director’s guarantee (this is a personal guarantee).
As a director of a company, you will own shares in the company. A company can raise capital by selling shares to third party investors. A sole trader structure does not consist of shares, leaving a sole trader to rely on bank loans or partnerships for extra money.

Business Income

A company can choose to retain profits made in order to grow, rather than paying out dividends to shareholders. These profits are taxed as income to the company. Any funds you receive from the company will be shown on your individual tax return to be completed separately.  Sole traders do not have this option; everything the company earns is considered to be your individual income. Therefore, a sole trader must pay all tax involved with their business as personal income tax.  If you plan on growing your business, a company structure, although more complex, will be more beneficial in the long run.

Costs Involved

A sole trader will pay a set-up cost to ASIC of under $40 (for registering a business name), compared to approximately $550 in fees (for incorporating a company). This includes:

Obtain Australian Business Number – Free
Register a proprietary limited company under ASIC – $576

Yes, incorporating a company will cost you a little bit more however the benefits heavily outweigh those of a sole trader. These are just some of the reasons why you should consider restructuring your business.

Related articles: 5 things you need to know before starting a new business | Transition from Sole Trader to Company

Related Tag:- Commercial Law Firm

Helen Kay - Managing Director

Helen Kay

If you require any assistance with your business legals or any other commercial legal issue, please do not hesitate to contact me.

Typical Legal Disclaimer!…

Unfortunately, there is never a ‘one size fits all’ formula to apply. Every situation is unique and it can be tricky to wrap your head around some areas of the law. To ensure you are setting yourself and your business up for success, it is always best to consult a legal professional with expertise in the field.

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