Pros and cons of company registration vs ABN sole trader

12 minute read

  • In this article, we break down two of the most common business structures in Australia—company registration vs. sole trader.
  • Which is best for tradies, freelancers, SMEs, and eCommerce owners?
  • These pros and cons will help you decide what’s best for your business idea.

As well as Australia’s abundant resources and great weather, our economy is booming more than ever. According to data released by the World Bank, Australia is one of the fastest places to start a business, as it takes only two days of regulatory procedures to get going. Starting a new business in Australia is not only exciting, it can equally be terrifying. As your own boss you need to tick off a list of things to make sure your business kicks off smoothly.

Once you decide to start your own business, there are two different ways of going about it; you can either create a company, or set up as a sole trader. According to the Australian Bureau of statistics, there were 2,402,254 active businesses in Australia as of June 30 2021; this signifies a 3.8% increase in the number of businesses. An increase in numbers means stiffer competition. Therefore, to help in selecting the best business structure to adopt, this article takes a look at the pros and cons of each route.

Overview:

Sole traders

This is the simplest business structure. A sole trader is an individual that owns, controls and manages a business. As a sole trader, even though you can employ other individuals to work for you, you are legally responsible for all aspects of the business. The business and the owner are seen as the same entity, i.e. the same tax file number and Australian Business Number is used by both business and owner. Also, the responsibility for all profits, debts or losses incurred in running the business can’t be shared with other individuals apart from the owner.

Advantages of being a sole trader in Australia

Inexpensive setup cost

There are few costs to be dealt with when operating as a sole trader in Australia. Apart from the yearly renewal of business name, administrative expenses are generally lower due to the simple business structure.

Less paperwork

Due to the simple and direct structure of the sole trading business, there are fewer reporting requirements and generally less paperwork involved in running the business efficiently.

Easier tax filing

When operating as a sole trading business in Australia, there is no need to file separate tax returns for your business. This is because business income is treated as individual income and you’re not mandated to have a separate business account. The Australian taxation office holds the sole trader responsible for any tax to be paid by the business.

Full control of business

In operating as a sole trader, you have full control of your business. What this means is that you’re responsible for all matters relating to decisions and the efficient management of the business.

Disadvantages of Being a Sole Trader in Australia

Unlimited liability

One of the biggest disadvantages of being a sole trader is unlimited liability. Since the business and the owner are seen as one, in cases where things go wrong, liability can extend to personal assets and resources of sole traders.

Tax planning limitation

There are fewer tax opportunities to take advantage of as a sole trader when compared to that of a company. As business profits or losses can’t be split with any other person, the sole trader is personally liable to pay tax on all income which includes earnings from the business. The treatment of business income as personal income can lead to a higher tax rate.

Lack of continuity

Since a sole trader operates independently, the business ceases to exist once the sole trader dies, retires or is unable to carry out business activities for whatever reason.

Limited source of capital

Sourcing for capital to run a sole trading business is quite tricky. Sole traders are not required to keep financial statements, which makes it more difficult to get loans from the traditional lenders. Hence some of the typical sources of funding for sole traders are family, friends and personal savings, or (re-)mortgaging your house.

Company registration

Companies have a more complex business structure compared to a sole trader. The two main types of companies you can set up are private or proprietary limited companies and public limited companies. With a separate legal entity from its owners, a company has its own legal existence, uses its own individual tax file number (TFN) and Australian Business Number (ABN). It can incur debt, sue and also be sued. Owned by shareholders, the personal liability is limited to the amount invested in the company activities. As a company’s owner (shareholder), you are not responsible or accountable for any loss incurred by the company. A company’s business activities are overseen by directors and company secretaries appointed by the shareholders.

Advantages of Registering a Company in Australia

Limited liability

A registered company and the owners are legally separate, which means the owners (shareholders) are not personally liable for debts or liabilities incurred by the business.

More efficient tax planning

Operating as a company gives room for more efficient tax planning with benefits like tax-free threshold and income splitting between owners to spread tax burden. Unlike sole traders required to pay tax on all income, the base company tax rate for registered companies is 25%* regardless of profit. Ensure you speak to a registered tax agent to ensure the planning is all legal. *for the 2021/22 tax year, provided your aggregated turnover is less than $50 million. If your aggregated is higher, then the company tax rate is 30%

Better chance of continuity

A company is structured to always be functional. Shareholders make sure a director is always accountable and available to oversee business operations.

Greater ability to raise capital

A company can easily raise capital by making shares available to the public in exchange for part ownership of the company. Better and well structured financial statements mean a company can more easily approach traditional lenders for loans.

Disadvantages of Registering a Company in Australia

Slightly higher setup cost

As companies are more complex and structured, there is a slightly higher set-up cost when compared with sole trading. Extra costs may include the cost of registering the company ($512 fee charged by ASIC), and the mandatory annual review fee (currently $276) and higher compliance requirements.

Comprehensive paperwork

Running a company involves keeping detailed, accurate records of the day to day activities of the business. Apart from the annual review, the company has financial and legal requirements to show all relevant activities of the business in the yearly records.

Limited control of business

Since ownership of a company can be shared among numerous people, it becomes difficult to exercise full control over the business. Other owners have to be consulted and notified before certain decisions can be made.

Which is the best structure for my company?

If owning a business is new to you and you’re still not sure about the business structure to opt for; here are some suggestions to help guide your decision.

Tradies

Also referred to as a tradesman or tradeswoman, tradies are people who specialize in a particular skilled trade e.g. a carpenter, an electrician or a mechanic. For anyone looking to start a trade business, the cheapest, easiest and fastest option is to set up as a sole trader. However, you should consider the implications of having unlimited liability if something goes wrong financially, and the increased ability of companies to lend to acquire important working equipment.

Freelancers

Freelancers are people who are self-employed. They render services and work for different companies and individuals without a legal employer-employee relationship. They are hired when needed, and paid in relation to the particular job done. As a freelancer, it may be better to operate as a sole trader initially. This is because your finances and tax obligations are more straightforward. However, the moment your income starts to really pick up, consider operating as a registered company to enjoy benefits like protection of personal assets, less tax burden, etc.

Small Business Owners

Small Business Owners are responsible for the operation, control and profitable utilization of the business assets. Choosing whether to operate as a sole trader or a registered company essentially comes down to how much risk you are comfortable dealing with. It is also essential you consider the overall cost implication of running a registered company. However, if owning a startup is relatively new to you, you can start out as a sole trader and switch to a registered company as soon as you start to generate enough sales to cover all necessary expenses. Skip ahead to read about how you can switch from a sole trader to a registered company and vice versa.

eCommerce

e-Commerce is simply the buying and selling of goods or services online. It involves the transfer of money and data to complete transactions through the internet. As a sole trader running an eCommerce business, one major advantage is your operating expenses are kept at a minimum. However, you might have to sacrifice key features that will affect services you can render. While your eCommerce business is not limited in reach as a sole trader, you may want to opt for operating as a registered company to reap maximum rewards. Not only will you enjoy the better tax rate, you’ll also have the time to spend on pursuing other goals. Perhaps your business needs are unique and you’re not certain about the best structure for your business. Sleek’s friendly expert team can further explain the pros and cons of each business structure. To get the best Australian business registration service, reach out to us here.

Can I run two different business structures for businesses I own?

Absolutely! For someone with the intention of running two different businesses, you can do so using the different business structures. In fact, many business owners run more than one business efficiently using different structures. E.g. You can operate as a freelancer with the sole trader structure, and also be a business owner operating under the structure of a registered company.

However, if you intend running multiple similar businesses, you can register multiple but similar structured business names under a single Australian Business Name. In simple terms, different business structures can be run simultaneously, but under different ABNs. And on the other hand, similar business structures can be together under the same ABN.

Can I change from one business structure to another?

Yes, you can change from one business structure to another. Before taking that step, ensure you’ve carefully studied the corporations act and considered things like: the legal name of your company, how your company will operate, directors and secretaries etc. To change your structure from sole trader business structure to a registered company, you need to:
  • Register your company through the Business registration service. This procedure involves applying for an Australian Company Number (ACN), company’s ABN, business name and other important business filings like registration with the Australian Securities and Investment Commissions (ASIC).
  • Transfer any licenses and assets to the newly registered company.
  • Your sole trader ABN cannot be transferred to your new company, so it needs to be cancelled with the Australian Business Register (ABR).
To change your structure from a registered company to a sole trader business, you need to apply for a new ABN for you. In a situation where you want to keep the former registered business name, you will also need to apply for the business name to be transferred to yourself. You will also need to submit a final tax return for the company ABN, and apply to wind the company up. Contact the friendly team at Sleek for advice on how to do this correctly.

Wrap up

Choosing the right business structure is important in your business journey. While we have tried to shed light on key differences between the structures, it is important you have a good think about your vision and mission. Whether you choose to run your business as a sole trader or as a registered company, the most important thing is to make sure you’ve selected the best structure for your business size, nature and goals.

If this is your first time, or you need help getting started with your own AU business, reach out to Sleek. We’ve got all the expertise you need to start your business successfully.

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