When you’re in those early stages of setting up your business, it’s important to get your head around some of the major decisions that could impact the future of your business. One of these big choices in the start-up phase of your business is deciding which kind of structure to go with.
We are here to help provide a simple overview of some of the main differences between a sole trader and a company business structures.
If you’re not set on which way to set up your business it may be wise to have a chat to a business professional first. They can share their pearls of wisdom on what kind of structure is going to work best for you and your business.
Sole trader business structure explained
There are various types of business structures across the globe and believe it or not the humble sole trader is said to be one of the simpler business structures to understand. A sole trade business is ran by one person who is legally responsible for looking after all of the business affairs and issues.
A sole trader structure means you are the owner and are held accountable for all the profits and losses of the business which are recorded in your personal income tax return.
This also means that you are accountable for paying any liabilities of the business too. If your sole trader business was to default on any financial obligations, as the owner you would be personally responsible.
There are a lot of attractive reasons why business owners select the sole trader business structure, mainly because it involves low costs and is a flexible kind of business set up.
Company business structure explained
A company is a legal entity which also involves additional reporting requirements, it is set up with directors who run the business and is owned by its shareholders. While there is some added protection for assets, the directors of your business can still be held legally liable for their actions and any debts/liabilities of the company.
In comparison to a sole trader business structure, a company is likely to have higher establishment and administration costs
Companies are also regulated by the Australian Securities & Investments Commission (ASIC).
What are some of the main differences between a sole trader and company business structure?
When it comes to making the big calls and choices about the business there’s a big difference between these two structures. A sole trader (the business owner), as the name suggests is the sole and only one responsible for making decisions about the business.
For companies there are a few more cooks in the kitchen at decision time. The shareholders appoint directors to make the main business decisions. The company constitution sets out the directors’ key duties and other duties in the Corporations Act and general law.
The set-up process
As a sole trader one of the first things, you need to do to get the ball rolling is get your Australian Business Number (ABN) sorted. The next step (unless you are planning to trade under your own name) involves registering a business name.
The process for setting up a company involves a few more steps. You will require an Australian Company Number (ACN) as well as an ABN. To receive your ACN, you must register your company with the Australian Securities and Investments Commission (ASIC).
You may also need to have a registered business name if you are not planning to trade under your company’s legal name.
When it comes to the financial side of things, it has always been a smart suggestion to keep your personal and your business banking separate. For sole traders this is not required, but for a company structure it is mandatory.
Growing the business
It is potentially easier for a company structure to grow quicker, with the option to attract investors through offering shares. This allows for shareholders to own a portion of the company. There are various ways that a company can offer shares, like issuing them directly or providing different share options.
Sole trader business structures do not offer the option to issue shares. To raise funds and help grow the business, sole traders will often seek out a loan from the bank or finance provider. Having a business loan will also attract the repayment of interest which may impact the cash flow of the business.
Sole traders are generally less involved when it comes the types of paperwork and required reporting involved. At tax time the, the business income and expenses are processed through your individual tax return using a sperate business and professional items section.
Financial records must also be kept for a minimum of 5 years, including tax returns. 1
For a company structure the process is a bit more complex. The record keeping involves a separate tax return to be lodged, and financial records must be kept for at least 7 years to comply with the Corporations Act 2001, and tax returns for the past 5 years.
The financial records may need to include details like:
- record and explain transactions and financial position and performance
- enable true and fair financial statements to be prepared and audited.
- Companies are subject to annual review by the Australian Securities and Investments Commission (ASIC)
Companies are also subject to Companies are subject to annual review by the Australian Securities and Investments Commission (ASIC)2
Protecting your business, regardless of its structure
Whether you are a sole trader or a company, businesses of all kinds are exposed to the risk of a potential claim occurring. That’s why it is vital to consider protecting your business with the appropriate kinds of insurance to suit your business’ needs.
From protecting your business with Public Liability insurance*, right down to safeguarding your tools with Portable Equipment insurance*, business insurance is designed to help keep your business around for the long haul.
At Public Liability Australia, we take the hassle out of getting your business insurance sorted. Get multiple competitive quotes from selected leading Australian insurers are only a few clicks or a phone call away. Select the policy to suit your business and be covered in minutes.
* This information is a general guide only and does not take into account your objectives, financial situation or needs. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording. The information contained on this web page is general only and should not be relied upon as advice.
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