If you’re thinking of changing from a sole trader to a company, it’s important you know what your reporting, legal and tax obligations are. To help you decide which business structure is right for you, we’ve compared the costs, liability requirements and reporting obligations for both sole traders and companies.

If you’re starting out and aren’t sure which business structure best suits your needs, read our business structures  information.

Sole trader Company
Set up costs

Sole trader business structures have fewer set-up costs. Your costs may include:

Companies are more complex business structures, and have higher set-up costs. These costs may include:

Record keeping A sole trader is a simple business structure so it generally has less paperwork.

Business income and expenses go in your individual tax return using a separate Business and professional items schedule – you don’t need to lodge a separate tax return for your business.

You need to keep your financial records, including tax returns, for 5 years.

You need to make sure you notify government agencies of any business changes within 28 days.

A company generally has more paperwork and potentially higher ongoing costs.

Companies must:

Your financial records must:

  • 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).

You will also need to keep records that show your compliance with your other obligations and legal requirements of companies. These requirements include having:

  • a registered officer
  • a principal place of business
  • regular company meetings
  • a written record of meetings and resolutions.

    You need to make sure you notify government agencies of any business changes within 28 days.
Business income The Australian Taxation Office (ATO) treats the money you earn in your sole trader business as your individual income. This means you are also responsible for any tax your business must pay

 

You can claim deductions for costs incurred in running your business

 

You can withdraw money from your business bank account.
Money the company earns belongs to the company. Even if you own the company (you are a shareholder), the money belongs to the company

 

A separate business bank account is mandatory for a company

 

As a director, the company may pay you wages or directors’ fees, but you cannot draw money from the company as personal drawings

 

If you receive funds from your company, then you must show the funds on your individual tax return.
Business debt liability

You are personally liable for financial or tax debts in a sole trader business structure.

There is no division between business assets or personal assets (including your share of joint assets such as houses or cars).

Assets in your name can be used to pay business debts.

The company is generally liable for all business debts. However, your personal assets can also be at risk if you’re a director of a company and the company can’t pay its debts.

As a director, you are personally liable for pay as you go (PAYG) withholding and superannuation debts. Even when you cease as a director, you are liable for the period you were a director.

A company can own property or assets, and these belong to the company – not the directors nor the shareholders. The company may sell these assets to help pay its debts.

Insurance Your business activities will determine the type of insurance you need, for example the business type, whether you sell products or services and if you employ people.

You should consider insurance for personal injuries, disability and death, as sole traders aren’t covered by workers’ compensation insurance.

You require workers’ compensation insurance if you employ staff.

As with sole traders, your business activities will determine the type of insurance you need.

Directors and officers liability insurance is not compulsory but may be considered by directors.

You require workers’ compensation insurance if you employ staff.

Generally, directors will not be held liable for the debt of a WorkCover claim. The company is liable.

Accessing money from your bank As a sole trader you can take money out of your business account as personal drawings.

A separate business bank account isn’t compulsory for sole traders, but it is recommended to keep track of your business finances.
A separate business bank account is mandatory for a company.

As a director, the company may pay you a salary, wages or director's fees, but you cannot simply withdraw money as ‘personal drawings’ from the company. You may also receive money via shares, dividends or loans
Control of business In a sole trader structure, you will have full control over your business. This also means that you are personally liable and responsible for all aspects of running the business

In a company structure, if you are the only director, you will have full control over your business, but certain decisions must still be recorded as resolutions of the company.

If there is more than one director, you will not have full control. All directors govern the internal management of the company and in line with certain rules, such as the company’s constitution or the replaceable rules.

The most important obligations for directors include the duty to:

  • act in good faith
  • act in the best interests of the company
  • exercise care and diligence
  • prevent the company trading while insolvent
  • report to and help the liquidator on the affairs of the company if the company is closing.
Ongoing costs You’ll need to update your business name annually. The cost of a business name registration is $36 for 1 year or $85 for 3 years. Different fees may apply to your company at different points in time, depending on your business operations. 

Your company has an annual review date, usually the same date it was registered. Shortly after this date, ASIC will issue an annual statement and an invoice. You need to pay the annual review fee to keep your entity registered.
Closing your business You need to cancel your ABN and cancel your business name within 28 days of ceasing trading. Closing a company is more complex than just ceasing trading. A company needs to be formally deregistered so that it ceases to exist as a legal entity.
Employing people

Both sole trader and company business structures can employ staff. In either instance, you will need to:

  • provide workers’ compensation insurance
  • understand your tax and superannuation obligations
  • understand your employees’ entitlements.

Specifically in a company business structure, directors have a legal responsibility to ensure the company meets its pay as you go (PAYG) withholding and superannuation guarantee charge obligations.