Running your small business… should you be a sole trader or a company?

It’s a question many business owners have to ask themselves… should you run the business as a sole trader or move to a company structure?

Perhaps you started out as a sole trader, but you are experiencing significant growth and you want to make sure you structure the business effectively.

Or maybe you are about to launch a new business and you want to create a strong foundation that future-proofs your enterprise for what will come.

Here at North Advisory, we often help our clients make this decision and during the process we highlight some key points for them to consider.

Marius Fourie, Director and Business Advisor, discusses our approach and highlights why we make certain recommendations.

A company, however, is recognised as a separate legal entity, so any of those commercial risks are contained within the company… your personal assets are protected.

Marius continues:

“A lot of people might think ‘I’m insured, I have professional indemnity insurance,’ but that’s not actually covering commercial risk… that’s the professional insurance that covers you if you perform your work poorly. An example of commercial risk is if you don’t pay a supplier and they take legal action.

Or you get into a dispute with a supplier where you feel you shouldn’t pay and they believe you should… these situations are not covered by professional indemnity… no insurance covers you for that kind of thing.”

The potential for commercial risk is a key reason you would choose to move away from the sole trader business model to a company or other structure.

While a sole trader is the simplest and cheapest way to start your business, we believe the benefits of the company structure are worth the investment.

There are some initial set up costs involved when you register your company with ASIC, but in the long term, the cost of running your business as a sole trader is certainly comparable to that of a company.

Marius concludes:

“From our perspective, the business accounting services we provide are on par, regardless of your structure, so the ongoing costs are the same. But the decision should be based on ‘how are you setting yourself up for the future?’ and I can’t think of any circumstance where I’d risk my family home and family wealth to outside commercial influences.”