Difference Between a Sole Trader and a Company
The primary difference between a sole trader and a company lies in their legal structures, influencing factors such as liability, taxation, and overall governance.
If you’re thinking about transitioning from a sole proprietor to a company, it is crucial to understand the significant variances and evaluate whether this transition aligns with the needs of your business.
| Sole Trader | Company | |
| Set-up costs | Establishing a sole trader business involves lower initial expenses. The costs are inclusive of: Registration of an Australian Business Number (ABN) – no cost.Business name registration (if required) – $42 for 1 year or $98 for 3 years.Potential bank fees if opting for a separate business bank account (optional). | Due to the complexity of creating a company, higher set-up costs are reflective of such. This may encompass: Registration of an Australian Business Number (ABN) – no cost.Reserving a company name – starting from $59Registering the company – $576 for a proprietary limited company Business name registration (if required) – $42 for 1 year or $98 for 3 years.Subject to bank fees for the business bank account. |
| Legal structure | A sole proprietorship is both owned and operated by an individual, with no legal distinction between the business and the owner. Generally, a sole proprietor faces fewer regulations and reporting requirements, making compliance simpler. | A company exists as a distinct legal entity that is separate from its shareholders. Companies typically face more regulatory obligations, including regular financial reporting, shareholder meetings, and adherence to company laws. |
| Liability | The owner bears unlimited personal liability for business debts and legal obligations. There is no separation between business and personal assets, meaning any assets in the owner’s name can be utilised to pay business debts. | Shareholders’ liability is typically confined to the amount invested in the company, offering personal asset protection. Property or assets owned by a company are distinct from the personal holdings of directors or shareholders. The company retains ownership, and it has the option to sell these assets to satisfy outstanding debts. |
| Business Income and Taxation | The Australian Taxation office considers the business income as personal income, eliminating separate taxation for the business. All profits and losses are disclosed on the owner’s tax return, and deductions can be claimed for business-related expenses. | A company is treated as a distinct entity subject to corporate tax rates. The earnings of the company are entirely attributed to the company, irrespective of shareholder status. Shareholders may also be taxed on any dividends received from the company. |
| Transferability | Transferability can be constrained as the business is closely linked to the individual. Typically, if a sole trader wishes to exit the business, the entire business entity, along with assets, brand name, and clients lists, may need to be sold. | In a company, ownership is denoted by shares which can be easily transferred between shareholders, allowing for a more straightforward change in ownership. Shareholders within a company can exit or sell their shares without disputing the company’s operations. |
| Accessing money from your bank | Given the absence of a legal separating between the business and the owner, the owner has the liberty to withdraw money from their business account at their discretion. While there is no requirement for both the business and owner to maintain separate bank accounts, doing so would aid in tracking the business finances. | In the case of a company, a separate business account is obligatory. As a director, you may receive a salary, wage of director’s fee, however direct withdrawals from this account are usually not permissible. |
| Employing staff | Both sole traders and companies employ staff, requiring, in both cases, that you: Obtain workers’ compensation insurance;Understanding your tax and superannuation requirements; andUnderstanding the entitlements of your employees. | |
| Management | The owner wields full authority over business decisions and operations. | Management responsibilities are typically distributed between shareholders, directors, and officers. Directors, appointed by shareholders, then select officers to oversee the day-to-day operations. |
