Should I be a sole trader or a company?

The right structure depends on your plans, your income, your risk and how much paperwork you’re prepared to take on. In short, a sole trader structure is simple and cheap but leaves your personal assets exposed. A company is a separate legal entity, but it costs more and comes with more rules. business.gov.au recommends getting advice from a business adviser, lawyer or accountant before you commit.

At a glance

	Sole trader	Company
Legal status	You and the business are the same	A separate legal entity
Liability	Unlimited. Your personal assets are at risk	Members are generally not liable for company debts. Directors can be personally liable in some cases
Tax	Business income goes in your individual tax return, at your individual tax rate	The company lodges its own tax return and pays tax at its company tax rate
Set-up	Simple	Complex
Cost	Low	Medium to high
Reporting	Fewer reporting requirements	Ongoing ASIC obligations, annual review and financial records
Control	Full control of your assets and decisions	Directors control operations, shareholders own the company

The set-up and cost ratings come from business.gov.au’s comparison of business structures.

Liability

Sole trader. business.gov.au says a sole trader has unlimited liability, and all your personal assets are at risk if things go wrong.

Company. A company is a separate legal entity. business.gov.au says that, as a member (shareholder), you’re not liable for the company’s debts. Your only financial obligation is to pay the company any amount unpaid on your shares if you’re called on to do so.

That protection has limits. Directors can be held personally liable if they breach their legal obligations. Under the ATO’s director penalty regime, directors can also become personally liable for some unpaid company amounts, including pay as you go (PAYG) withholding, GST and the super guarantee charge. See what is a director penalty notice.

Tax

Sole trader. The ATO says you use your individual tax file number (TFN), report all your income in your individual tax return using the business items section, and pay tax on all your income based on your individual tax rate. You can choose whether to make personal super contributions for yourself. You may also use, or be required to make, PAYG instalments.

Company. The ATO says a company must apply for its own TFN, lodge an annual company tax return and pay tax at its applicable company tax rate. A company usually pays its income tax by instalments through the PAYG instalments system. It must pay super guarantee for eligible workers, and this includes company directors.

business.gov.au notes that a sole trader can’t split business profits or losses with family members. It says a company may suit people who expect their business income to be highly variable and want the option to use losses to offset future profits.

How each structure affects your tax depends on your income and circumstances. Talk to your accountant or registered tax agent about your situation.

Set-up

Sole trader. business.gov.au describes a sole trader as the simplest form of business structure, and relatively easy and inexpensive to set up. You apply for an ABN and use it for your business activities. See how to get an ABN.

Company. You register a company with ASIC, for example through the Business Registration Service. Before you do, you need to decide on a company name, a registered office address, a principal place of business, company rules or a constitution, a share structure, and officeholder details. Directors must apply for a director ID before the company is registered. Once registered, the company receives an ACN and can then apply for its ABN. See how to apply for a director ID and ABN vs ACN.

Reporting and ongoing obligations

Sole trader. business.gov.au says a sole trader structure has fewer reporting requirements.

Company. business.gov.au lists ongoing obligations, including:

• updating ASIC within 28 days of key changes
• keeping financial records
• completing an annual review and paying an annual review fee
• directors completing a solvency declaration each year.

Cost

business.gov.au rates a sole trader structure as low cost, and a company as medium to high cost. It says companies involve higher set-up and running costs than other structures. ASIC’s registration fee depends on the type of company, and ASIC publishes current fees on its website.

Partnerships and trusts

These are the other common structures.

• Partnership. Two or more people who share income or losses. In a general partnership, each partner has unlimited liability for the partnership’s debts. Each partner pays tax on their share of the partnership income, and the partnership lodges its own annual return. business.gov.au suggests a written partnership agreement.
• Trust. A trustee carries on the business on behalf of the trust’s beneficiaries. The trustee can be a person or a company and is legally responsible for the trust’s operations. A trust deed sets out how it works. business.gov.au says trusts are expensive and complicated to set up.

How structure can affect access to finance

Your structure can change how a finance application is assessed, because the borrower is the entity that runs the business. A sole trader’s business income appears in their individual tax return, while a company or trust has its own tax returns and financial statements. Company directors may be asked to give a personal guarantee for business finance, which means a company’s limited liability may not protect your personal assets for that debt. No structure guarantees you will be approved, and access to finance on its own is rarely a good reason to choose one structure over another. If finance is part of your plans, raise it with your accountant when you’re deciding.

Step by step

1. Write down your plans. Think about your expected income, how much risk the business carries, whether you’ll employ people, and whether you’ll go into business with others.
2. Compare the structures. Use business.gov.au’s choose your business structure page to see how each one works.
3. Talk to an accountant. Ask them to compare the tax, liability, set-up and ongoing costs for your situation. A lawyer can advise on liability and director duties.
4. Register your structure. A sole trader applies for an ABN. A company needs director IDs for its directors, then ASIC registration and an ACN, then an ABN.
5. Check your other registrations. You may need to register for GST. See when to register for GST.
6. Review as you grow. Revisit your structure with your accountant if your income, risk or plans change.

Important things to know

• Limited liability is not total protection. Directors can be personally liable for breaching their duties, and for some unpaid company tax and super under the director penalty regime.
• A company’s money is not your money. A company is a separate legal entity with its own TFN and tax return. Talk to your accountant about how you can properly take money out of a company.
• You can change structure later. business.gov.au says you can change your structure as your business grows. Changing structure may have tax and legal consequences, so get advice first.
• Being a director has obligations. You’ll need a director ID, and you’ll need to keep company details up to date with ASIC.
• There is no one right answer. The best structure depends on your circumstances. business.gov.au recommends talking to a professional business adviser, lawyer or accountant before you commit.