Starting a business is an exciting time that comes with a whole host of considerations. One of the most important considerations is your business structure.

In Australia, there are four common types of business structure; Sole trader, Company, Partnership and Trust. However, the most common consideration for small business owners is whether to set up as a Sole Trader or Company.

There is often confusion when it comes to knowing the difference between the two structures and the benefits of each. Deciding which structure is right for your business will depend on your business situation and can have several determining factors such as:

  • Personal liability
  • Tax payments
  • Asset protection
  • Personal responsibilities
  • Start-up capital costs
  • Ongoing costs

In this article, we’ll look at three key differences between the setup and responsibilities of sole trader and company structures. We’ll highlight other key differences in follow-up articles over the next few weeks.

Personal liability

The amount you are personally liable for differs between sole traders and companies. If you are a sole trader your personal assets are not protected and you are personally liable for all aspects of the business structure, including any debts or liabilities.

As a company director, you are not personally liable for the company’s debts provided you have fulfilled all legal obligations as a company director.

Read more about personal liability

Tax payments

When calculating tax, sole traders are taxed as individuals and report business income in an individual tax return. Companies are taxed as a separate entity and report company income in the company tax return.

Read more about how tax is calculated

Asset protection

If you are operating as a sole trader you are personally responsible for all aspects of your business’ structure. A company is a separate legal entity but having a company business structure doesn’t automatically protect your assets. However, if you comply with your legal responsibilities as a director, generally the company will be liable for any company debts.

Read more about personal asset protection