What's the difference between a sole trader and regular company?
When choosing to do business, there are terms that you need to understand, especially when it comes to the structures available for businesses. Two of the most common business structures include sole traders and companies. A sole trader is someone who runs their own businesses – they are solely in charge of that business, it’s profits, expenses, and taxes. Then there’s the standard company – this business structure involves a shared responsibility. So, which one applies to you? Let’s look a little closer at the specifics.
Sole Trader
Under the sole trader business structure, both the business and the owner are identified with a single Tax File Number (TFN) and Australian Business Number (ABN). Therefore, the business can affect the personal assets of the owner in the case of liabilities arising from the business, like loan recoveries.
A Company
On the other hand, a company operates as its own entity, with its own account and shared liabilities. Differing from the sole trader structure, a company can be run by multiple people. Typically, a company will have a director or a board of directors and shareholders that all have a stake in the business. These stakeholders will all have partial control over how the company is run and major decisions. Unlike the sole trader, a company must lodge its own separate business tax return.
Why it’s important to choose the right structure
It’s important to register as the appropriate business structure for many reasons. If your business is only just starting out and it’s small, it might be too large of a step forward registering as a company – its a more complex structure that involves more running costs and reporting. On the other hand, choosing to run as a sole trader when your company structure is quite large doesn’t work out either (it would probably cost you more in tax in the long run). So, whichever category you fit in, always double-check with the ATO’s website or Business.gov.au that you’re registered as the correct business structure.
The Advantages of Sole Trader Business
- Easy to set up and report during tax time.
- Easy structure.
- Combined tax returns and accounting fees set up.
- Side benefits from concessions available to small businesses.
- No added deductions on earnings.
The Advantages of Normal Business
Running a company also attracts some benefits that you may not receive being a sole trader.
- You are not faced with full liability for financial burdens
- More ability to raise significant capital
- Can carry forward losses to offset profits
- More potential to sell and pass on ownership
- Profits can be reinvested in the company or paid to the shareholders as dividends
If you need a little more guidance on the financial side of running your business, it’s a good idea to speak to an accountant or tax agent to ensure you are meeting your financial obligations and calculating your taxes in accordance to your business structure.
Shoebox Books expert bookkeepers provide consultations for businesses of various structures. Shoebox accountants and bookkeepers are well vested in financial knowledge and can provide guidance and support with bookkeeping systems, tax returns, and business activity statements. Contact Shoebox today to get into contact with your nearest bookkeeper or accountant.
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