Each entrepreneur when first embarking on their journey to begin running their business has the option to either operate as a sole trader or as a company (pty ltd).
At first the differences may not seem obvious but the differences can affect your business and how it operates in a huge way. Below we will go in to some of the differences that each and every entrepreneur should consider before choosing to go down either route when setting up their new project.
As a sole trader, loans and business expenses are usually secured by personal assets. This means that if for some reason the business ends up in a state owing money the sole trader can end up losing personal assets and capital to make good on the businesses debts. This is called unlimited liability. As a company however, the liability is limited for funds and assets that are owned by the company. This means that the owner of the company is generally protected. This is called limited liability.
As a sole trader there are generally no rules (other than general laws) that govern the internal decision making process, meaning that a sole trader is free to make decisions for his/her business based on, well, whatever they really want. As a company however The Corporations Act (2001) sets out that decisions will be made on behalf of the company by the directors and that other decisions are to be made by shareholders. This can have the effect of a company making decisions that aren’t necessarily aligned with the founder’s decision (unless of course the founders are the sole shareholders and directors).
Start Up Capital and Costs
As a sole trader there are no means to sell shares of your business. In order to raise money the individual must either get a loan or enter some sort of partnership with another sole trader. As opposed to if you open a company you have the ability to secure capital from outside sources by selling them shares in your company. There are positives and negatives to selling shares to your company but these are out of the scope of this article.
If the sole trader dies, the business can’t be given to someone else, all assets and money of the sole trader is then handles as part of the sole trader’s personal assets. A company acts as itss own entity. If a founder of a company (pty ltd) passes the company shareholders and internal company laws are then used to decide what is to happen to that parties share in the company. The founder’s shares can be redistributes, sold or passed on to relatives and family of the director.
Sole Trader’s income is generally handles as the personal income of the sole trader. Usually personal tax systems are separate from company tax systems. In Australia personal tax is calculated in a tiered manner whereas a company’s tax is calculated at a flat rate of 30%. In different situations one can be more beneficial than the other to the individual looking to start operating their business.
Registration and Fees
Generally there is no registration fee for Sole Traders. Sole Trader’s receive an ABN can operate as a business under the Sole Trader’s name unless a business name is registered and associated with the ABN. If there are any costs involved they are generally far lower than a companies. As a Pty Ltd Registration can cost anywhere upwards of $500.00 and company registrant’s receive an CAN and then have to apply for an ABN separately (this may incur an additional cost). Companies generally have ongoing costs.
In summary, the main differences between a company – pty ltd vs a sole trader, is that a “pty ltd” acts as different entity with its own entity type, properties, laws and abilities that govern the way it acts. Generally speaking a sole trader is an extension of an individual and debts, taxes and operations are generally grouped in to those of the sole trader. A pty ltd offers limited liability to its directors and shareholders which could be a safe bet for anyone that is worried about procuring debt or losses during the course of operation, however the administration overhead for maintaining a company is generally higher.
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