Choosing a business structure is an important decision when starting or growing a business in Australia. Two common options are operating as a sole trader or setting up a company.
The right structure depends on your circumstances, business plans, risk, tax position and administrative requirements. This guide explains the key differences to consider before making a decision.
What Is a Sole Trader?
A sole trader is an individual who owns and operates a business personally. It is generally a simpler structure with fewer reporting requirements.
As a sole trader, you are personally responsible for the business’s debts, losses and obligations. Business income is included in your individual tax return, and you can generally claim eligible business expenses.
A sole trader structure may suit someone who wants to operate a relatively simple business and retain direct control over business decisions.
What Is a Company?
A company is a separate legal entity from its owners. A proprietary limited company, commonly known as a Pty Ltd company, has shareholders and directors and has its own legal and reporting obligations.
A company generally involves more administration than a sole trader structure. It must lodge its own company tax return and maintain appropriate company records. Directors also have legal responsibilities.
Sole Trader vs Company: Key Differences
| Consideration | Sole Trader | Company |
| Legal structure | You and the business are closely connected | Separate legal entity |
| Tax return | Business income is included in your individual return | Company lodges its own tax return |
| Liability | You are personally responsible for business debts | Company is generally responsible for its debts |
| Administration | Generally simpler | More reporting and compliance |
| Business money | You can take business drawings | Company funds belong to the company |
| Ongoing obligations | Generally fewer | Includes company records and ASIC obligations |
These differences mean that choosing a structure should involve more than simply comparing tax rates.
When Might a Business Structure Need to Change?
A business may consider changing structure as it grows, takes on additional risk, adds owners, acquires assets or changes its long-term plans.
For example, a business operating as a sole trader may later consider moving to a company structure. However, changing structure can affect registrations, tax obligations, assets and compliance requirements. A new ABN may also be required.
Before making a change, consider getting professional tax and legal advice based on your circumstances.
Which Structure Is Right for Your Business?
There is no single structure that suits every Australian business. A sole trader may offer simplicity, while a company can provide a different legal and administrative framework for a growing business.
D & B Accountants can help you understand the accounting and tax considerations involved in your business structure. We provide company formation services as well as business taxation and company tax-return services.
If you are starting a business or considering changing its structure, speak with an accountant before making the decision.
Frequently Asked Questions
Is a company always better than a sole trader?
No. Each structure has different legal, tax, reporting and administrative considerations. The appropriate choice depends on the business and owner’s circumstances.
Can a sole trader change to a company later?
Yes, a business can change from a sole trader structure to a company, but the change can involve new registrations, tax considerations and other obligations.
Should I speak to an accountant before choosing a structure?
Professional advice can help you understand the tax and accounting consequences of different structures before you establish or restructure your business.
Conclusion
The choice between a sole trader and company can affect your tax reporting, liability, administration and ongoing business obligations. Understanding these differences before starting or restructuring can help you make an informed decision.
If you need help assessing the accounting and tax considerations for your business, contact D & B Accountants to discuss your circumstances.