Set up steps and costs
A sole trader is a simple business structure to set up as there aren’t many legal or tax obligations. It’s important to understand that when you operate as a sole trade you are:
- The sole owner of the business
- personally responsible for business liabilities.
- Separate business bank accounts are recommended, but not compulsory for sole traders. You may be liable for bank fees, depending on the type of account you choose to open.
A company is a more complex business structure to set up as there are quite involved legal and taxation obligations. A company is a separate legal entity. This means it has the same rights as a natural person and can incur debt, sue and be sued.
As a sole trader, you’ll generally make all the decisions about starting and running your business, although you can employ people to help you.
The directors are in charge of the management of the company’s business; they make the strategic and operational decisions of the company and are responsible for ensuring that the company meets its statutory obligations.
How each is taxed
The company must lodged a company tax return each year. Depending on whether the company meets the criteria or not, it may be taxed at 30% of 27.5%.
As a sole trader, you pay the same tax as individual taxpayers, at the marginal individual income tax rates. The tax-free threshold is $18,200 for individuals. The rates can change from time-to-time, so it’s important to know what the rate is for the income year you’re reporting on.
Ongoing costs and compliances
Trading as a sole trader means that it’s just you, no other person or legal entity, that’s carrying on the business. Trading as a sole trader is the simplest of all the structures and is free to establish and has limited ongoing compliance (i.e. accounting/tax) costs associated with it.
A company is regulated by ASIC, as a separate entity there is legal and ASIC costs to set up as well as annual ASIC fees and higher accounting compliance costs.
Benefits of a company
Advantages of a company include that:
- liability for shareholders is limited.
- it’s easy to transfer ownership by selling shares to another party.
- shareholders (often family members) can be employed by the company.
- the company can trade anywhere in Australia.
taxation rates can be more favourable.