Sole Trader or Company? | What is the best business structure for me?
Having the right business structure is important for the operation of your business; for the future growth and direction of your business; for asset protection, and for tax reasons (we don’t talk tax though, so that’s one for you to raise with your accountant!).
It’s important for small business owners to understand their options when it comes to business structures and to know what can happen in practical terms when they don't have the right business structure for their business.
It's not difficult to draw on examples of the importance of having the right business structure in place, as unfortunately a lot of small business owners found themselves caught out during the COVID-19 pandemic period when it came to government stimulus packages and eligibility requirements. A lot of the time I found that small business owners hadn’t realised that they had different options when it came to their business structure.
If you’re just starting out in business, you might find our Beginners Handbook a handy reference to have, too.
Two of the most common business structures used by small business owners are a sole trader and a company.
A sole trader is when you are operating your business in your own name, as you personally. A company structure is where you set up a company (and this will have the letters Pty Ltd at the end of the company name), and you become a director and shareholder in that company. You might also have other directors and shareholders depending on your needs.
When considering your options, always talk to your small business lawyer and your accountant. It’s important to start with the end in mind when you are thinking about your business structure (as much as you can, at least, especially in the early days). Give some thought to what you intend for your business to do, and what sort of growth are you wanting to achieve in your business (both in terms of sales and your team). These are some of the questions I ask clients when we are exploring options around business structure, and these are the types of questions your small business lawyer will be asking you when you seek out this advice.
Many small business owners say to me ‘I’ll just stick with a sole trader for now, and see how things go’ and ‘if things go well, I’ll change to a company structure later’. That’s all fine, provided you go into this with your eyes wide open and you know what the options are, you know what they involved, and you understand your risk with a sole trader structure (this can be more important to some businesses than others depending on the type of business you are operating). Bear in mind that if you do decide to change business structures down the track, you will have to deal with administrative issues such as insurance policies, bank accounts, licensing, client contracts, retainers, business name, etc.
Where to start?
So where do you start? Before you speak with your small business lawyer, I suggest you give some thought to the below.
Start with your long-term vision.
• What do you want to achieve with your business. Is this a side hustle, or is this a business you want to build to support your lifestyle long term.
• Is this business something you are intending to build and then ultimately sell.
• Do you want to bring on partners or investors.
• Are you interested in building a team and offering them shares as an incentive.
• What revenue targets are you aiming for.
Then consider your risk profile.
• Is your business in a high-risk industry.
• As part of your risk mitigation strategy, you will have insurance, and you will have your water-tight, tailored business legals in place (you can read more about the importance of business legals). Does asset protection need to form part of your risk mitigation strategy.
• Is it important to you that your personal and family assets are protected.
(You can read more here on how to act now to protect your business.)
Once you have some clarity around your vision and your risk profile, you can consider the pros and cons of these business structure options. Your small business lawyer will provide you with in-depth legal advice on your options. The following is a bite-sized overview of what these options involve.
Sole trader
A sole trader means you as an individual are operating the business in your name, using your ABN. All the revenue is received by you and all of the expenses are your responsibility. You are liable to your clients and suppliers, and if something goes wrong you are responsible to deal with them. You personally hold all legal obligations for the business (think licensing, insurance, tax, superannuation etc), and you need to ensure you meet these obligations or you will be personally exposed to consequences and penalties.
Company
When you operate a company (which is a corporate entity) you will be the director which means you are controlling the company. You are still in charge. You have obligations under the Corporations Act 2001 (Cth) that you need to understand and comply with, and you need to ensure you are acting in the best interests of the company at all times. You will also have a level of asset protection with this structure because the company is the body that owns and operates the business and carries the risk and responsibility. The financial obligations stay with the company so that means the company receives the revenue and the company is responsible for the expenses and liabilities (except if you provide a personal guarantee as a director in which case you will have personal liability for those personal guarantees – for example, this is common when the company enters into a commercial lease as the directors are often required to provide a personal guarantee in respect of that lease).
A company structure will offer you some flexibility for when you want to bring on partners or offer incentives to employees, or when the business wants to bring in investors because the company can issue shares in these situations.
Getting your business structure right is vital for the long-term, sustainable success of your business.
If you don’t get it right, you can be setting your business up in a way that limits growth and opportunity, and you can be unnecessarily exposing your personal assets.
If you are keen to explore your options around business structure in more detail, feel free to book a time for a free 20-minute consultation here, and we can help get you on the right track.
