Here at Stellar Accounts we often get asked what is the difference between a Sole Trader vs Company vs Trust.
To help you navigate the different types of business structures and provide an indication of which may best suits your needs, we’ve outlined some of the advantages or disadvantages of each.
Important note: When setting up a new business we strongly recommend that you speak to an accountant to determine the most appropriate structure for your personal and business circumstances. You need to fully understand your tax obligations and have a plan in place for managing your bookkeeping and accounting.
What is the difference between Sole Trader vs Company vs Trust?
A Sole Trader is the simplest and most cost effective structure to use when you are first starting out in business.
A Company is a separate legal entity to the people who run it. The company lodges its own tax return and pays tax on its profits at the company tax rate – currently 27.5% (when aggregate turnover is under $10m).
A Trust is a business structure where a trustee (an individual or company) carries out the business on behalf of the members (or beneficiaries) of the trust.
Pros and cons of being a sole trader
The benefits of being a Sole Trader:
- You simply record the business’s income and expenses in your own personal tax return
- Doesn’t require Tax File Number
- Once you start trading at a profit, tax minimization can be harder because you’ll have to pay income tax at your applicable marginal tax rate. For example, if you earn over $180,000 the tax rate could be up to 47%.
- You cannot split income between family members
- No asset protection from creditors or in the event of a family breakup
Click here to read more about advantages and disadvantages of being a sole trader. <LINK>
Pros and Cons of Registering a Company
The benefits of setting up a Company:
- Company lodges own tax return and pays tax on its profits at company tax rate (generally 27.5%)
- Profits are distributed in form of franked dividends (once the company is paying tax on any profits)
- Provides limited liability to the shareholders (limited to the amount they’ve invested as share capital)
- Asset protection benefits because creditors of the company cannot access the assets of shareholders
- Requires Tax File Number and ABN for the company
- Depending on income level, you may also need to be registered for GST
- Superannuation is payable on wages taken from the Company
- Small businesses need to be aware of tax implications for personal expenses or withdrawing a wage
- Loans between directors and the company must be paid back by the end of that financial year (30 June)
Click here to read more about setting up a Company. <LINK>
Pros and cons of setting up a Trust
The benefits of a Trust:
- Ideal for family businesses – a family member can be made a beneficiary without having any involvement in day-to-day running of the business
- Once trading profitably, provides trustee tax effective income distribution options
- Asset protection advantages because beneficiaries are not legal
- Tax losses must remain in the trust and applied to future income, they cannot be distributed to beneficiaries
- There are tax implications if distributing to children
- In some instances (such as personal services businesses), majority of profits must be taxed in name of person providing the services.
- Find out more here about Trusts here, or speak to Stellar Accounts before deciding to move to a Trust structure.
What type of business structure do I need?
Not sure whether a sole trader, company or trust business structure will suit your personal and business? Stellar Accounts can help!
Contact Us today and request a 45 minute business consultation. These can be conducted in person at our headquarters in Chermside, North Brisbane, over the phone or via skype.
SPECIAL OFFER: Until 31 January 2018, we’re offering a 45 minute business consult for just 55, normally $75.