Sole Trader vs Company

Every year, thousands of Australians open small businesses and operate as sole traders to help save on costs as they send their business out into the world. However, as businesses grow, so do profits, risks and liabilities and staying fixed as a sole trader is not always the best option. 

Choosing the right structure for your business from the beginning can help you avoid future costs and headaches. 

There are pros and cons for either structure, and it is important to ensure you choose the right option for your business and trade.

Company Registration

A proprietary limited company registration may be the best option for businesses that anticipate quick growth or more complex industries.

Pros:

• Limited Liability: One of the significant advantages of registering a company is limited liability. The owners’ personal assets are generally protected in case of business debts or legal issues.
• Credibility: A registered company might project a more established and credible image to customers, suppliers, and potential partners compared to a sole trader.
• Tax Benefits: Companies may have access to certain tax advantages and deductions not available to sole traders.
• Potential for Growth: Companies often have easier access to funding, the ability to issue shares, and a clear structure which often makes it more feasible for a company to scale and attract investment.

Cons:

• Complexity and Costs: Setting up a company involves more paperwork, legal formalities, and ongoing compliance requirements. This usually translates to higher initial costs and ongoing administrative expenses.
• Regulatory Requirements: Companies have stricter compliance obligations, including annual reports, meetings, and more stringent record-keeping.
• Less Privacy: Company details are typically more publicly available than those of sole traders, including directors’ information, financial reports, etc.

Sole Trader

A sole trader option may be beneficial for smaller businesses who are unsure what sort of growth they will experience and plan to operate in their sole capacity.

Pros:

• Simplicity: Operating as a sole trader is simpler and less costly to set up and maintain. There are fewer legal and administrative requirements compared to a company.
• Full Control: Sole traders have complete control over decision-making and business operations.
• Privacy: Sole traders usually have more privacy as their business details are not as publicly disclosed compared to companies.

Cons:

• Unlimited Liability: As a sole trader, you are personally liable for business debts and legal liabilities. This means your personal assets are at risk if the business runs into financial trouble.
• Limited Growth Potential: Sole traders might find it more challenging to raise capital or attract investment compared to companies.
• Perceived Credibility: Some clients or partners might perceive a sole trader as less credible or stable compared to a registered company.

Considerations for a Business Owner

There are many considerations for a business owner to evaluate when establishing their business entity. 

• Consider the nature and size of your business. A smaller, low-risk venture might find operating as a sole trader more suitable initially.
• Assess your comfort level with personal liability. If avoiding personal liability is critical, a company structure might be more appropriate.
• Both structures have different tax obligations and benefits. Consulting with a tax professional can help determine which suits your circumstances better.

Ultimately, the choice between company registration and operating as a sole trader depends on various factors like your business goals, risk tolerance, growth aspirations, and regulatory considerations.

Consulting with legal and financial advisors can provide personalised guidance based on your specific situation. Contact our team of business lawyers who can provide you with the right advice.