What could I be personally liable for as a sole trader vs. a company director?

Question Sole trader Company

Are my personal assets protected by the business structure?

Can I be personally liable for the debts of the business or company?

  • Yes.  As a sole trader you are personally liable for all aspects of the business, including any debts or liabilities of that business. Debts cannot be shared.
  • Generally speaking, if you comply with all of your legal obligations as a director, the company will be liable for the company's debts. This means debts or liabilities of the company will be paid by the company, not you as a director.
  • However, if you breach your duties as a director, you may face regulatory action (e.g. for criminal or civil action under the Corporations Act 2001) and/or you can be ordered by a court to pay compensation to the company or the creditor.
  • If the company does not meet its PAYGW and SGC obligations, as a director you’ll be personally liable for penalties equal to these amounts.

What insurance do I need?

  • Your business activities will determine the type of insurance you require – for example, your business type (online, home-based etc.), 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.
  • Workers' compensation insurance is required if you employ staff.
  • Your business activities will determine the type of insurance you require – for example, your business type (online, home-based etc.), whether you sell products or services, and if you employ people.
  • Directors and officers' liability insurance is not compulsory but may be considered by directors.
  • Workers' compensation insurance is required if you employ staff.
  • Generally, directors will not be held liable for the debt of a WorkCover claim. The company is liable.

Can I take money out of the business bank account for my personal use?

  • As a sole trader you can take money out of the business bank account as personal drawings.
  • A separate business bank account is not compulsory, but recommended to keep track of your business finances.
  • No. 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 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.
  • 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.

What duties/responsibilities do I have?

  • You are personally liable and responsible for all aspects of running the business.
  • There are a variety of legal obligations and duties imposed on the company and on directors as individuals.
  • It’s important to check out the What duties/responsibilities do I have? page for detailed information on your obligations as a director.

What records do I need to keep?

  • Record keeping is a legal requirement.  For tax purposes you must keep records for at least five years.

What if I employ staff?

More information...

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