Plenty of people reading this will have thought about leaving their nine-to-five job, and starting their own business. It’s common to view this as a means of escaping the drudgery that so often makes up the work day. And then there is the freedom, and ability to be your own boss, and to do whatever you like. However, after moving beyond this initial stage of optimistic fantasy – it quickly becomes apparent that being your own boss is an awful lot of work. It is also hard to decide whether to start a company, or become a sole trader.
The following discussion outlines some of the primary pros and cons of being a sole trader, or creating the common “Pty Ltd” company.
Decision Making
A Pty Ltd company will need to run all decisions through its directors, in accordance the the Corporations Act. A sole trader can simply make decisions as they see fit, without worrying about what other parties think (within the law, of course).
Loan Security
A limited company can use its own assets as security for loans. However, directors are sometimes asked to give personal guarantees. Sole traders often need to use their own personal assets to secure loans, which can include their family homes.
Liability
This area is where having a limited company can be particularly beneficial. For shareholders, they can only be liable for unpaid shares that they own. If they have paid for their owned shares in full, they cannot be held liable by creditors. Directors largely cannot be targeted for debt recovery either, unless they have okayed trading after the company was made insolvent.
A sole trader does not have a limited business. Any debts that they owe can affect their personal assets, including their own home, if they are unable to pay their creditors.
Raising Capital and Investment
A company can offer shares to raise investment capital. On the other hand, sole traders are not able to do this. They need to ask for capital from banks, or become partners with other sole traders.
Costs for Capital and Startup
In a company, shareholders are not able to claim the costs of their shares as tax deductions. However, sole traders are able to claim the costs of starting a business as tax deductions.
Taxes
A company pays the corporate tax rate, which is 30 percent. In order to submit its tax return, a company will also need appropriate financial accounts. For a sole trader, payable tax depends on how much they earn. This is the marginal rate, after accounting for losses, costs, etc. The money made by the sole trader’s business is treated as their own personal income, for tax purposes.
Fees and Registration Costs
Starting a company comes with several costs. These include ASIC registration and yearly review fees. They will also require licensing fees for a range of different activities. These fees are often higher than they are for sole traders. However, sole traders must pay no fees to register or continue a business. Their licensing costs are also usually lower.