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Are you confused about which business structure to choose? Want to have a detailed guide on sole trader vs. company tax? Knowing what business structure will suit you best is extremely integral to determine company success and growth. Figuring out the right fit can aid you in creating a perfect business plan for optimal profits. You can stop worrying because this blog brings you an all-inclusive analysis of sole trader and company structures.
Before we dive in to know all about the tax benefits for each structure, let’s have a basic study on the two structures. This will help you understand everything that you need to know about these two business structures for a profitable decision.
There are many areas to look into when deciding on a business structure. Below enlisted are the main categories in regards to sole trader vs Company tax you need to know about prior to registering yourself.
Being the only person accountable for your business as a sole trader, your income is categorized as individual income. On the other hand, when you are a registered company, the income that is earned is considered company income. Even if you are a shareholder, there is no exception.
Compared to sole traders, businesses have limited liability. In the case of a sole trader, you may have to pay for losses out of personal savings. Being a company shareholder, you only are responsible for company debts. So, you only lose the money you put in. This is all because sole traders do not have a proper legal existence, unlike companies.
If we talk about set-up and operation costs, companies need to spend more. Sole traders have limited set-up costs, such as only paying for a business name registration. Companies, however, have to pay for company registration, business name registration and reservation. Plus, companies operate on a greater scale compared to sole traders. This makes running a company way more expensive.
Sole traders, may or may not opt for a separate business account. They can process business transactions through personal accounts. It is mandatory for a company to have a separate business account to thrive legally.
A sole trader owns all of his business, and a company has classifications. In a company, the business control is distributed between directors. In the case of a single director, he may have full control but is still subjected to certain limitations.
In the case of sole tradership, the owner can sign up for death, injury or disability insurance. If he has employees hired, he needs to have worker’s compensation insurance. In the case of companies, they can avail directors and officers liability insurance. Also, in the event of an unfortunate situation, a director is not held responsible for satisfying a WorkCover claim. The company is held liable for the same.
Sole traders have to file an individual tax return which must consist of details about personal services income. A company has to lodge a company tax return which should include income, deductions and taxation details.
Tax rates for sole traders are according to the individual income rate. For companies, the full tax rate is 30 per cent, and the lower tax rate is 27.5 per cent. Company types are used as a basis to understand tax rate applications. You may check the ATO’s official website for updated and detailed information about tax rates or seek professional help from a sole trader tax accountant.
Since sole tradership business income is taxed as personal income, they receive the benefit of a tax-free threshold. In companies, a tax-free threshold option is unavailable, and so they have to pay taxes on the entire income.
For sole traders, the option is limited when compared to companies. Companies on getting their brand names registered are protected from plagiarism cases. Sole traders do not have access to such protection. Also, the owner death may result in a sole proprietorship shut down. In case of the death of a director in a company, meetings are held to appoint a new director. Thus, company growth and success are not affected much by unforeseen circumstances.
When you profit from selling an inventory asset, you are liable to pay taxes for the same. This is known as Capital Gains Tax. The tax rate depends on the asset type and personal income accounting to the year the asset was sold off. All sole traders must pay Capital Gains Tax on profits received. Companies, however, have to pay Corporation Taxes. Corporation tax rates remain the same regardless of the profit earned. With CGT, the rate shifts as per profit rates, so it is better to consult a small business tax accountant for more comprehensive assistance.
Payroll taxes are taxes paid on wages offered to employees. Both sole traders and companies are required to make payroll tax payments if they hire employees.
If your annual business turnover is $75,000 or more, you are eligible to pay Goods and Services Tax (GST). Both sole traders and companies have to pay GST. A sole trader with an annual business turnover of less than $27,583.24 (20 lakhs) doesn’t need to register for GST.
PAYG instalments are payments made by businesses to pay out their income tax liabilities. These payments can be made quarterly, monthly or annually. A business not registered for GST can pay this instalment amount annually. Others usually pay quarterly. PAYG Withholding is applicable for businesses with employees, Pay As You Go Withholding is the amount employers have to withhold from an employee income to pay for their income tax liabilities.
Now that you know the basic differences and similarities between a sole proprietorship and a company, deciding will be easy. When choosing a business structure, assess the pros and cons accurately to find what’s more suitable. A business structure is decided best when aligned as per business size requirements. All factors considered sole trader vs. company tax benefits accounts for a significant difference between the two business structures. Make a decision based on budget and expense estimates to precisely identify what would be best for your business plan.