You’ve got a business idea. You’re excited. Maybe you’re going freelance in a service-based industry? Perhaps you want to set up a product-based business?
You’ve got a business name – it’s so catchy! And you cannot wait to apply for your ABN…
But – do you set up as a sole trader or a Ltd company?
What’s the difference between a sole trader and a company?
A sole trader is the simplest and “easiest” business structure. You operate as a sole trader and therefore you and your business are considered a single entity.
A company is a separate legal entity. You must have at least one shareholder (owner) plus one or more directors to make management decisions. The size of the business can range from 'humongous' levels including multiple directors and staff... or it can still simply be that you’re the sole shareholder and director.
Sole trader: pros and cons
As a sole trader is the simplest and cheapest business structure, it’s tempting to jump in and register. And thankfully, lots of successful businesses run as sole traders for many years and are hugely successful.
Pros:
- You’re the boss!
- Easy to understand structure
- Sole trader businesses enjoy fewer set-up costs and less ongoing costs
- Potential tax benefits for low-income generating businesses
- You keep all the profits – no dividends or profit shares
- You can easily wind up the business.
Cons:
- You carry all the risk (financial or otherwise) if something goes wrong
- Limited business life – if you’re not running the business, no one else is running it!
- No access to income splitting (a potential tax strategy)
- If you hire staff, you are personally responsible for PAYG and SUPER obligations.
LTD company: pros and cons
Companies are more complex business structures and have higher set-up cost – but also come with more potential benefits to enjoy.
Pros:
- Less risk - your personal assets are protected from any losses incurred by your business (*note: while the company is generally liable for all business debts, your personal assets can also be at risk if you’re a director of a company, so always speak to an accountant about the pros and cons)
- Access the help and advice of others (rather than the burden of being the sole decision-maker) by accessing the knowledge and experience of your co-Directors
- Easier to raise capital, if needed
- Easier to expand into a group of companies
- Taxation benefits are increased while liability is decreased
Cons:
- More complicated to set up with higher costs associated
- Ongoing running costs (payroll, taxation, etc)
- If there is more than one director, you will not have full control
- Closing a company is more complex than just ceasing trading.
Your choice of business structure will depend on many factors, including your business goals, your lifetyle, and your unique situation.
As you can see, there are pros and cons of different business set ups.
At Profacc Accountants & Financial Planning, we help businesses of all shapes and sizes.
Speak to our team of experienced accountants if you want advice about how to structure your business, or want to change the structure of your business, please. We will help you decide which is the best business set up for you and then take you through the process of setting everything up.