Difference between a sole trader and a company

Question
Sole trader
Company
What are the set-up steps and costs?
How is tax calculated?
  • Companies are taxed as a separate entity.
  • Report company income in the company tax return.
  • There is no tax-free threshold for companies.
  • The company tax rate is currently 30% and 27.5% if you're a small business with an aggregated turnover less than $10 million.
  • As a director, you need to report any income you earn from the company or other sources in an income tax return. You may also need to lodge a fringe benefit tax (FBT) return if you receive fringe benefits.
What is the volume of paperwork and ongoing costs?

A sole trader is a simple business structure so it generally has less paperwork and lower ongoing costs.

Paperwork:


Ongoing costs:


A company is a more complex business structure so it generally has more paperwork and potentially higher ongoing costs.

Paperwork:


Note: The level of complexity changes depending on what kind of company you’re setting up.

Ongoing costs:


How is business income accessed?
  • Money you earn is treated as your individual income.
  • You can claim deductions for costs incurred in running your business.
  • You can withdraw money from business bank account (separate business bank accounts are recommended, but not compulsory).
  • Money earned by the company 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 simply draw money from the company as ‘personal drawings’ from the company. You may also receive money via shares, dividends or loans.
  • Private companies that make tax-free distributions to shareholders or in the form of payments, loans or debts forgiven, have to adhere to Division 7A Income Tax Assessment Act 1936 (Division 7A).
Who is liable for business debts?
  • You are. Sole traders are personally liable for financial or tax debts.
  • There is no division between business assets or personal assets, (including your share of joint assets e.g. house or car).
  • Assets in your name can be used to pay business debts.
Can I employ staff?
Do I have full control over the business?
  • Yes - as a sole trader business structure you will have full control over the business.
  • If you are the only director then you have full control 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 – the internal management of the company will be governed by all the directors and in line with certain rules, for example, the company's constitution or the ‘replaceable rules’.



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