A common question when setting up a business is should I register as a sole trader or company? Which business structure is right for me?
Most people will start out their business as a sole trader. It’s an easy business structure to set up. You just need to register for an Australian Business Number (ABN). There’s no cost involved registering for an ABN, and once you’re done, you can start advertising, getting clients/customers or jobs and invoicing for your work. Other alternatives are a partnership, company or trust.
There are a few important things to consider when deciding what business structure is right for you.
1. Risk
There are risks involved when running your business, such as being sued. Are you in an industry where the service or product you offer carries this risk? Do you think you may hire contractors or employees? Will you be signing a lease agreement or loan and taking on financial risk? Your business insurance should cover a certain amount of risk, but some elements may fall short of your insurance.
As a sole trader, your business is you, you are both one entity. This means if your business is unfortunately sued you are personally liable to put in for any financial remedies. Your personal assets will be on the table, such as your home or any other investments. If you think your business could potentially expose you to this you may want to consider setting up a company or trust which will protect your personal assets as they are considered a separate entity.
A company has ‘limited liability’. It has its own Tax File Number (TFN) and ABN. This means that if your business is sued, the financial repercussions are only bound to the assets in the company and any personal assets are not up for grabs. This is the same as a Trust.
2. Costs
It is relatively inexpensive to set up as a sole trader. It’s free to register for an ABN and your sole trader income is included as part of your individual tax return.
A company or trust has more costs involved such as registration costs in the beginning and also annually. Compliance costs are much higher and the company or trust will also need to lodge a Tax Return and have financial statements prepared by an accountant.
If you intend to hire staff you will need workers compensation and if your wages bill goes over a certain threshold, you will have to pay payroll tax.
3. Tax
As a sole trader all your income is included as part of your individual tax return and is taxed the same tax rates. If you have no other salary or investment income, this means you get the tax-free threshold of $18,200, and then tax rates increase depending on income.
The tax rate for a company is a little different. If the turnover is less than $25 million the net profit of the company is all taxed at a flat rate of 25%.
Meaning, you can roughly earn $100,000 profit (not income) as a sole trader before paying the same as the company tax rate of 25%. If your business is earning over $100,000 profit, you pay less tax in a company structure.
A company can tax plan by strategically paying directors a wage or fee to take advantage of the individual marginal tax rate and the company then pays less tax.
4. Growth
Even at the early stages of your business you should consider growth.
A sole trader structure has minimal costs and tax in the beginning but it does have a small capacity to grow to earn $100,000 in profit. Marginal tax rates encourages less earnings, so that less tax is paid. Some may find this structure restricted and contracted.
A company (or trust) has higher costs and tax, but has unlimited capacity for growth. It allows big goals and expanding evolution encouraging business growth.
If you feel your business will expand and create great wealth a company or trust structure may be the best option. If this is the case we can help you. If you have more questions or require advice as to what business structure is right for you contact us today