Setting Up a New Business – Company or Sole Trader?
Setting Up a New Business – Company or Sole Trader?
Becoming a business owner is a dream-turned-reality moment for many. While you may start your own business, whether you really become the sole owner depends on the business structure. It is crucial to understand the inherent differences between business structures to adopt a style that best suits your needs and goals.
The most common business structures are sole trading and a company. Here’s a brief look into the differences between the two business structures.
Ownership
As a sole trader, you are in charge of your business completely.
As a company, you are not completely entitled to business ownership. Responsibility and liability are split among shareholders and directors as well.
Decision-Making
The sole trader is alone entitled to make decisions regarding his or her business.
When it comes to a company setup, it is the directors who take the major decisions, as dictated by the Corporations Act. The Act also sets aside certain situations where shareholders are entrusted with decision-making.
Business Liability
As a sole trader, the entire liability for debts, losses and loans, lies with you. Your personal assets are not considered different from business assets. Any unpaid loans can be recovered through legal possession of your personal assets.
As a company, shareholders are liable to the extent of the debts they owe. So, if shareholders have zero-debt shares, their liability is zero. Directors are not usually liable for company debts. But, they can be made liable if they decide to continue business after becoming bankrupt.
Unpaid loans are generally recovered by securing company assets. Directors may, sometimes, be required to lend personal guarantee for loans.
Business Capital Procurement
As a sole trader, you are not legally eligible to raise capital by offering shares. You would have to approach lending institutions such as banks, or partner with fellow sole traders. You are entitled to tax benefits though – your business start-up costs can be claimed as deductions.
A company can raise capital by issuing shares to external entities. The tax benefit of deductions does not apply to investment costs incurred by a company.
Entitlement to Profits
As a sole trader, the profits that your business makes become part of your taxable income.
As a company, retained profits can be distributed among shareholders, or can be channelled to business growth. Retained profits become part of company income and are taxable.
Taxes
If you are a sole trader, you are treated as an individual and corresponding tax laws apply. You’ll have to use an Individual Tax Return format to report income from your business. The final tax amount that you’ll be required to pay depends on your business income and the eligible deductions you have claimed. You have the benefit of a tax-free income limit.
As a company, your income is treated as a separate entity for tax purposes. The Company Tax Return is used to file business income. As a company, you don’t get the benefit of a tax-free threshold.
As evident, each business structure comes with its own pros and cons. The choice ultimately depends on your threshold for risk and the level of control you aim to wield over your business.