Running your small business… should you be a sole trader or a company?
Posted by Northadvisory on August 18, 2021
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.
Minimising commercial risk
When we look at a business run as a sole trader versus a company – or any other business structure – essentially there is very little difference in the tax treatment. This is especially true when the business focuses on professional services… your decision about structure really comes down to minimising commercial risk. Marius explains:
“You won’t necessarily achieve a better tax outcome being a company or a sole trader… if your accountants know what they are doing, it should work out almost the same. The main reason you would choose to set up a company over being a sole trader is to make sure you aren’t exposed to commercial risks.
All businesses have some level of commercial risk but if you are a sole trader, everything that you and your family own is exposed to those risks. Your family home, all your assets… everything is in the pot.”
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.
Preparing for future growth
Another important reason that business owners set up a company is to be prepared for future opportunities. It is far more complicated to expand or sell a business if it is based on a sole trader.
“When it comes to expansion and bringing additional people into the business or finding investors, you can’t sell part of yourself to someone… but you can sell shares in the business. So, if you are a sole trader and someone wants to join with you, you have to move into that type of structure in order to offer them a portion of the business.
The inverse is the same as well… if you want to sell your business it’s much harder to do as a sole trader because everything is intertwined with your life. If you want to sell off part of the business, that’s not as clear cut as it is with a company.”
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.”