Naturally, you want to be your own boss and take control of your business. After the initial flight, you’ll ask which role is better in starting a business? A sole trader or a sole director?
These are the differences and benefits of the 2 different structures.
Decisions-making
Sole Trader: He or she makes all decisions about the business, there are no such restrictions.
Sole Director: The Corporations Act (the Act) states that the majority of decisions will be made by the directors, on behalf of a company. The Act also sets out other decisions that will be made by shareholders.
Liability
ST: The liability of sole traders is not limited. Generally, loans provided to sole traders will be secured by their personal assets, sometimes include the family home.
SD: Restriction regarding liability is one of the benefits of operating a company which is limited, including Pty Ltd companies.
- Shareholders — the liability is limited to the unpaid capital of shares owned. Shareholders liability will be zero if they have no debts associated with their shares. If the company goes into debt and shareholders have paid all amounts owing, the creditors won’t be able to recover any debts from the shareholders.
- Directors — If a company goes into debt, creditors cannot recover any debt from directors, unless they have given the green light for the company to continue trading after insolvency.
Security for loans
ST: Generally, loans provided to sole traders will be secured by their personal assets, sometimes include the family home.
SD: Any loans provided to companies can only be secured by its assets. Although, in certain circumstances, directors may be requested to provide personal guarantees.
Investment & capital raising
ST: They aren’t able to offer shares. If sole traders want to add capital, they must seek financing from lenders (banks) or join other sole traders in forming a partnership.
SD: Through offering shares, companies are able to procure investment from outside parties.
Capital raising & start up costs
ST: Sole traders can claim expenses used in setting up the business as a deduction against assessable income.
SD: Shareholders cannot claim their investments in a company as a deduction against assessable income.
Tax
ST: Depending on their personal marginal rate, sole traders pay tax. Income derived through a business operated by a sole trader is considered as the sole trader’s assessable income.
SD: Companies pay tax at the corporate rate of 30%. A company must have financial accounts on hand in order to submit a tax return.
Retained profits
ST: At their personal marginal rate, profits of sole traders will be taxed. They cannot retain any profits.
SD: Generally, companies are not required to issue profits to shareholders and can use the profits to facilitate growth in the business. Although, retained profits are taxed as income of the company.
Tax losses
ST: Sole traders have the ability to offset any losses from one source of assessable income to another.
SD: Companies with multiple businesses can offset any losses from one of the entities against the income of the other.
Carried forward losses
ST: Sole traders can carry tax losses to future years.
SD: A company can carry any tax losses to future years — taking into account any special ownership and business continuity rules.
Consumer protection
ST: When dealing with state-based sole traders, consumers are protected by various legislative instruments, such as the Fair Trading Act.
SD: The Competition and Consumer Act 2010 (Cth) protects consumers whenever they are dealing with a company.
Registration & fees
ST: There are no registration or annual fees. Business licensing fees are often lower for sole traders than for companies.
SD: There are a number of costs associated with a company, including an ASIC registration fee and an ASIC annual review fee.
A company must pay licence fees if it engages in certain types of activities. Often, such fees are more expensive for a company than for a sole trader.
Creditors & Insolvency
ST: The rights of creditors of sole traders who become insolvent are contained within the Bankruptcy Act 1996 (Cth) and associated legislation. Creditors can contact the Insolvency and Trustee Service Australia (ITSA) for further information.
SD: The Act outlines the rights of creditors in the event that a company becomes insolvent. Creditors can contact the Australian Securities and Investment Commission (ASIC).
Regulated by specific legislation
ST: There is no equivalent legislation regulating sole traders.
SD: Companies are regulated by the Act and governed by a constitution, or the Replaceable Rules contained within the Act.
Succession
ST: Sole-operated businesses don’t enjoy perpetual succession. As such, the assets will be dealt with under the sole trader’s estate plan, etc.
SD: Companies are treated as a distinct legal entity and enjoy succession. This allows the organisation to survive the death of members and directors — share ownership being dealt with under the deceased person’s will.
Startup loans in Australia
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