Many sole traders think that they have to register a Pty Limited company in order to trade.
This is a common misconception.
In fact, there is very little advantage of registering a company when you’re trading as an individual, and for some it can result in increased compliance costs and headaches.
We’ve put together this quiz for independent earners to find out if it’s worth registering as a company.
Use Hnry’s quiz below to see whether or not you should register as a company or stick to being a sole trader:
DISCLAIMER: Results are indicative and do not constitute financial, legal, or other forms of advice.
Should I set up a company for my sole trader work?
This is one of the first questions that freelancers and independent contractors will ask themselves as they begin their journey of independent earning.
Many of those who are new to self-employment will instinctively opt to take on a company structure rather than remaining as a sole trader - but this is often unnecessary and can create additional complexity and headache in the future.
So let’s go over the pros and cons of registering as a company - and in the process we’ll debunk some of the common myths circulating in the self-employed community.
Pros and cons of registering a Pty Ltd Company
- (Potentially) Less Liability. There is a perception that you have less liability, while this is true in some cases directors are not automatically protected and can still be held liable for debts occurred even if the company is deregistered/ becomes insolvent. You will be personally responsible for as much debt as you take on. This is especially true if you take a business loan or use your home as a guarantee and you’re the only shareholder of the PTY Ltd company.
- It is often easier to raise capital from banks. If you need to take on large loans for capital/equipment this should be a significant consideration.
- It’s easier to sell off portions of the business. If you want to bring in additional shareholders, partners, or investors, then a company structure is required.
- More complicated tax bills. When operating a company the main way to get money out of the company is to pay yourself a wage - which is taxed at your individual tax rate. This means you can essentially be taxed at the company rate for profits and at a personal rate for any wages paid. Any profits of the company will be taxed at a 2020 company tax rate of 27.5%.*
- Increased set up & operating costs. Setting up a business can be expensive with registration fees for the company, annual renewal of these registrations, and increased costs from compliance like business bank accounts - all to support a business structure that may be unnecessary.
- Complicated accounts. You are likely going to have to hire an accountant for your annual accounts and keep diligent records in case you are audited by the ATO.
Pros and cons of being an ABN Sole Trader
- Simple accounting. You simply keep all the profits made while trading, rather than having to pay yourself a wage out of company profits.
- Low compliance costs. It’s easy to register as an ABN sole trader and it costs very little time and money to maintain that structure. From the onset you save hundreds if not thousands on registration fees to the government, lawyers, and accountants.
- Lower tax bills (in most cases). You are taxed only at your personal tax rate when running as a sole trader. This means you are taxed once and only once, and don’t have to worry about company profits, paying yourself a wage, and director’s drawings.
- You get all the benefits of trading as a company. You still get an ABN number, can have a business name, and can claim expenses - all without the compliance costs of being a Pty Ltd company.
- (Potentially) Higher Liability. If something goes wrong, or if you incur significant debts, then you are personally responsible. Although this can be easily offset by professional indemnity insurance, it is still a worry for many. It’s important to note though that setting up a Pty Ltd company does not automatically make you immune to liability; in fact, in many cases your liability is the same.
- You cannot own the business with others. If you want to bring on a business partner or add other business owners, you will need to register as a Pty Ltd company.
As you can see there are both benefits and drawbacks to both structures. If you’re not going to be employing staff, taking on large loans, or sharing ownership, then being a sole trader is likely the best route for you to go down.
While this decision might feel a bit complicated, we have created a simple quiz to figure out what structure is best for you. 👍
*This should not be taken as financial advice. Company taxes are complicated and nuanced based on what industry and size you are operating at. If you have concerns or questions, contact a chartered accountant to see what structure is best for you.