Sole Trader vs Company - What's the Difference?

Starting a business is a big deal, and picking the right structure is one of your first and most important choices. Australia's two prominent (and most popular) options are being a sole trader or setting up a company.

Each has pros, cons, and implications for taxes, liability, and legal requirements.

This guide explains these differences in detail and provides examples to help you decide what's best for your new venture.

1. Sole Trader vs Company – Legal Structure

For the sake of this guide, let's introduce Jane, the sole trader, and Evergreen Innovations Pty Ltd, the company.

We'll use these two examples to illustrate the contrasting dynamics between operating as a sole trader and forming a company in Australia.

Sole Trader

Being a sole trader is about as straightforward as it gets in the business world. It's just you -the owner – running the show.

There's no legal separation between you and your business, which means you're personally responsible for everything that goes on.

Example: Jane decides to start a freelance graphic design business.

She registers as a sole trader, meaning she is the business's sole owner and is responsible for all its operations, including profits and losses.

Key Characteristics of a Sole Trader:

📍Under the sole trader business structure, you can employ staff to help manage your business.

If you choose to do that, you must fulfill certain obligations, including obtaining workers' compensation insurance and making superannuation contributions.

Company

A company is a separate legal entity from its owners (shareholders). It can incur debt, sue, and be sued.

Companies are more complex to set up and operate than sole traders, but they offer several benefits, including limited liability and easier access to capital.

Example: Evergreen Innovations Pty Ltd is a digital marketing agency formed by three shareholders.

The company is registered with the Australian Securities and Investments Commission (ASIC) and operates as a separate legal entity from its owners.

Key Characteristics of a Company:

When starting your business as a company, it's essential to understand these key elements:

2. Sole Trader vs Company – Taxation

Sole Trader

For sole traders, business income is treated as personal income and taxed at the individual's marginal tax rate.

This means the sole trader's profits are combined with any other personal income (such as wages) and taxed accordingly.

Example: Jane's graphic design business earns $80,000 in a year. This amount is added to her personal income and taxed at her marginal tax rate, which might vary depending on her total yearly income.

Key Taxation Aspects for Sole Traders:

Company

Companies are taxed separately from their owners at a flat corporate tax rate.

As of 2024, the tax rate for small businesses (those with an annual turnover of less than $50 million) is 25%, while larger companies are taxed at 30%.

📍 Check out the Treasury Laws Amendment (Cost of Living Tax Cuts) Bill 2024 for more information.

Example: Evergreen Innovations Pty Ltd earns a profit of $200,000. The company pays a 25% tax ($50,000) on this profit.

Suppose the company distributes the remaining $150,000 as dividends to its shareholders. In that case, the shareholders will pay personal income tax on these dividends.

Still, they can also claim franking credits for the tax the company has already paid.

Key Taxation Aspects for Companies:

3. Sole Trader vs Company – Liability

Sole Trader

One of the significant risks of operating as a sole trader is unlimited liability. This means the owner is personally liable for all business debts and obligations.

If the business fails, the owner's personal assets, such as their home or car, may be used to settle these debts.

Example: If Jane's graphic design business incurs a debt of $50,000 that it cannot pay, creditors can claim Jane's assets to settle the debt.

Key Liability Aspects for Sole Traders:

Company

A significant advantage of the company structure is limited liability.

Shareholders are only liable for the company's debts up to the value of their shares, which protects their personal assets from being used to settle company debts.

Example: If Evergreen Innovations Pty Ltd goes bankrupt with debts exceeding its assets, the shareholders only lose the value of their investment in the company. Their assets are not at risk.

Key Liability Aspects for Companies:

4. Sole Trader vs Company – Advantages and Disadvantages

Sole Trader

Advantages:

✅ It is easy and inexpensive to set up and operate. Registration as a sole trader involves minimal paperwork and costs.

✅ The owner controls all business decisions, like setting prices, managing clients, and retaining all profits.

✅ The business can be quickly restructured or dissolved without formal, complex legal procedures.

Disadvantages:

❌ Personal assets are at risk if the business incurs significant debts.

❌ Harder to raise capital and attract investors than a company structure because sole traders are often perceived as higher-risk ventures.

❌ The owner is solely responsible for all aspects of the business, from client acquisition to accounting, which can be demanding and stressful.

Company

Advantages:

✅ Personal assets of shareholders are protected from business debts.

✅ Easier to attract investors and raise capital by issuing shares, for example, for expanding its operations.

✅ A company structure can enhance the business's credibility and appeal to clients and investors.

Disadvantages:

❌ More expensive and complex to set up and operate. Companies require registration with ASIC, and ongoing tax and accounting compliance involves additional costs.

❌ Companies must comply with stringent regulatory and reporting requirements.

❌ Profits are taxed at the company level, and dividends are taxed again at the shareholder level, which can result in double taxation.

5. Sole Trader vs Company – Regulatory and Compliance Requirements

Sole Trader

The regulatory requirements for sole traders are relatively minimal. The key obligations include:

Company

Companies in Australia are subject to more strict regulatory and compliance requirements, including:

Conclusion

As a sole trader, you'll enjoy the simplicity and full control of the business but also face higher personal risk and funding challenges. 

On the other hand, forming a company offers limited liability, greater credibility, and easier capital raising.

However, it comes with higher setup costs and more regulatory requirements.

It all comes down to your personal preferences, the size and nature of your business, and your vision.

How Can ANNA Help Your Business?

With ANNA, starting and managing your business becomes a breeze.

Whether diving into entrepreneurship or growing your existing venture, ANNA has everything you need to get started hassle-free.

So, what's ANNA One all about?

It's your one-stop shop for business setup and financial management.

Register your company for free and get a nifty business account that handles all your bookkeeping, invoicing, GST, and taxes.

No more stressing over tax deadlines or accounting headaches!

Ready to take the leap? Here's how it works:

But wait, there's more! 

So, why wait?

Register your company with ANNA today and watch your dreams take flight!