Sole Trader v Company Decision Tool
Do You Properly Understand the Consequences of Operating Your Business as a Sole Trader versus Company?
Are You About to Unnecessarily Flush $100 Notes Down the Drain?
Use Our 2 Minutes Decision Tool to Find Out
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Who should use this tool?
Whether you have just got your ABN or have been in business for many years, its never too late to consider the consequences of operating as a company versus a sole trader.
Why we created this tool?
We came to realise that many of our clients (and start ups generally) didn’t properly understand the benefits and costs of setting up as a company. Many were making a decision based on the fact that a sole trader was simpler or cheaper – neither of which is a good reason.
What’s different about this tool?
This is the only tool we have found that actually measures the costs and benefits of a company versus a sole trader.
All other advisers we have experienced do rough guesses (at best).
The reality is that you can’t make an informed decision without putting a dollar estimate against both the cost and benefit.
What is the basic difference between a Sole Trader and Company?
A sole trader refers to the situation where you (as an individual) own the business. In effect, the business and you are the same legal entity.
A company is a legal entity which is separate from the shareholders (owners) of the company.
What are the benefits of a Company over a Sole trader?
1. Maximising tax deductions – this can include motor vehicle deductions and other expenditure
2. Greater protection – for example, if a Sole Trader is sued, then your personal assets are on the line. If a company is sued, then you are usually one step removed.
3. Possibly the greatest benefit of all – with a Company, most entrepreneurs get a better understanding of the diffrence between being a business owner and being a worker
4. Fundraising – it is usually easier to raise funds because investors see you as being serious
5. Sale of Business – it is easier to sell the business because you can sell the entire company and not just the assets and liabilities.
What are the additional costs of a Company?
1. Government set up fee of $444 plus external advisor costs (if relevant)
2. Annual statement fee from ASIC of $224 plus external advisor costs (if relevant)
3. Additional accounting fees for company tax return
How much is the additional accounting fees for company tax return?
Of course, this depends on your accountant but in our experience its not as high as many make out for the following reasons:
1. A sole trader needs to lodge a Professional & Business Schedule anyway (and this would include all the financial information in a separate Company Tax Return)
2. A company can often claim greater tax deductions which well and truly offsets the cost of the additional return
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What is a ‘shareholder’?
The shareholders are the owners of the company.
The shareholding of a company can be created so that different shareholders have different rights
What does the term ‘officeholder’ mean?
An office holder is either a director or secretary.
If there are multiple shareholders in a company, how can each shareholder make sure that their rights are protected?
If you have multiple owners, we strongly recommend that you get a Shareholders Agreement drafted. This will ensure that all your rights and obligations are established so as to minimise any doubts for the future. We can help you with this. Call us on 1800 347 845 or email [email protected]
What are the duties of a director?
1. Ensuring that the company does not trade insolvently
2. The company keeps adequate financial records
3. Exercise your powers and duties with the care and diligence that a reasonable person would have which includes taking steps to ensure you are properly informed about the financial position of the company and ensuring the company doesn’t trade if it is insolvent
4. Exercise your powers and duties in good faith in the best interests of the company and for a proper purpose
5. Not improperly using your position to gain an advantage for yourself or someone else, or to cause detriment to the company, and
6. Not improperly using information obtained through your position to gain an advantage (again for yourself or someone else)
What are the recommended steps in setting up a company?
1. Decide on the type of company (start ups are usually Private or Pty Ltd)
2. Brainstorm possible names (if not already registered)
3. Check existing names, domains and trademark (if not already done)
4. Get clear on shareholders and directors and get necessary consent.
5. Decide on whether to go with Replacable Rules or separate Constitution. (Most sole director and shareholder businesses use the Replacable Rules.)
We also recommend that you consider registering the relevant domains and a trademark in relation to the name.
How can I register the company?
There is no online facility for company registrations. So most people use an advisor such as us. We can have your company registered within minutes. For help with this, call 1800 347 845 or email [email protected]
You can also do it yourself by snail mail by visiting the ASIC website at http://www.asic.gov.au/
After setting up as a sole trader, is it possible to switch to a company (or visa versa)?
If you have only recently set up, then its easy to switch.
If you have been trading for over 3 months, you should check the tax consequences of switching. Talk to us for further details on this.
What About a Decision Tool that would cover the situation of multiple owners – ie Partnerships versus Companies?
We are working on this but in the meantime, if you have more than one business owner, there are even more benefits of operating as a company. To talk about those benefits call us on 1800 347 845.
Disclaimer – This tool is intended to provide general input only for those people considering whether to set up as a sole trader or company . It does not take the place of specific advice on your circumstances. Also the benefits and costs are necessarily based on estimates. Some of those estimates. The point of the tool is not to provide an exact measure but simply to give start ups a sense of the benefits and costs of a company over a sole trader. Also note that this tool does not make any claims as to tax deductibility or that you can rely on a company in lieu of insurance. For specific advice or help, call us on 1800 distil (1800 347 845).