Sole trader or company and how to decide between them

As a sole trader, you are the business. There is no separate legal entity. You need an ABN in your own name and, unless you trade under a name other than your own, that is the only registration you need. If you do use another name, you register it as a business name.

The income is yours. It goes in your personal tax return and is taxed at your personal rates. There is no separate business return and no ongoing ASIC fees just for being a sole trader. Setup is quick and cheap.

The catch is liability. Because you and the business are one person, a debt or a legal claim against the business is a claim against you. If a job goes badly wrong or a supplier is not paid, your savings or your share of the house can be exposed.

This is general information to help you see the difference. Your accountant can confirm which structure suits your circumstances, and that conversation should happen before you commit.

How a company is different

A company is a separate legal entity. It is registered with ASIC, gets an ACN, then its own ABN and tax file number. It can own assets, sign contracts and owe money in its own name.

For shareholders, liability is limited in most cases. There are exceptions, and they matter. Directors can be personally liable in some situations, such as letting the company trade while insolvent, and lenders often ask small business owners for a personal guarantee.

Companies pay tax at the company rate. For a small company that is a base rate entity, the rate is 25%. Money you take out as wages or dividends is then dealt with in your own return.

Then there is the admin. A company needs at least one director, and every director needs a director ID. It needs a registered office address in Australia. It lodges its own tax return. And every year it has an ASIC annual review, which means paying a review fee and keeping the company's details current. Directors also carry legal duties, even in a one-person company where you are the only director and shareholder.

Weighing it up

Cost and admin are the real trade-off. A company brings the ASIC registration fee, the yearly review fee, accounting fees for a separate return, and your own time. None of it is large on its own. It comes round every year, though.

Against that, you weigh risk and income. A freelance graphic designer working from a spare room, with low overheads and modest earnings, will often find a sole trader setup does everything they need. A builder taking on large contracts and employing a couple of apprentices carries a lot more exposure if something goes wrong, and a company may well be worth the extra paperwork.

You do not have to get this right forever on day one. Businesses often start as a sole trader and move to a company once they grow. Moving later does take work, because the company gets a new ABN and any business name you hold as a sole trader has to be transferred to it, so talk to your accountant before you switch.

Whichever way you go, we handle the registration side. As a sole trader, we apply for an ABN for you, and if you trade under another name we can register that business name too.

For a company, we register proprietary companies limited by shares. Have the proposed company name, the registered office address, and each director's and shareholder's details ready, including each director's director ID. You check the name is available, fill those details into our company registration form and pay. We lodge the application with ASIC, and you get the company's ACN. You can add an ABN application for the company to the same order.

If you would rather not use your home as the registered office, our Premium Registered Office add-on gives the company a Sydney CBD address, with mail scanned for you. And once the company exists, we can pay its yearly ASIC review fee each year as well.

We are not tax or legal advisers, so the choice of structure is one to settle with your accountant. Our team is on 1300 070 000, Monday to Friday, 9am to 5pm Melbourne time, if you want to talk through what our form will ask.