If you are starting a business or thinking about restructuring how your business is organised, you might be juggling back and forth between the options of being a sole trader and forming a company. These two structures offer different advantages and disadvantages, and it is important to be familiar with these differences to make an informed decision. In this article, we’ll discuss the three key differences between a sole trader and a company, and help you identify which structure suits your business best.
Liability
One of the biggest differences between a sole trader and a company is liability. As a sole trader, you are personally liable for the debts and liabilities of your business, and you will be required to pay your creditors from your personal assets if your business cannot pay its debts. On the other hand, if you form a company, the company will be a separate legal entity that is responsible for its own debts and liabilities, and your personal assets will generally be protected from creditors of the company.
Taxation
Another major difference between a sole trader and a company is in taxation. As a sole trader, you and your business are considered one and the same for tax purposes, and you will be taxed on the business’s profits at your personal income tax rate. In contrast, a company is taxed separately from its owners, and it pays corporate tax on its profits. While the corporate tax rate is generally lower than personal income tax rates, you will need to pay additional tax if you pay dividends to yourself or your shareholders.
Ownership and Governance
Lastly, the ownership and governance of a business differ significantly between sole traders and companies. As a sole trader, you are the only owner and decision-maker of your business, and there are no formal legal requirements you are obligated to follow. In contrast, a company has directors who control how it is run, and shareholders who own the company.
There are also strict regulatory standards that companies need to comply with such as preparing annual financial reports, holding annual general meetings, and filing their tax returns promptly.
It is important to weigh the advantages and disadvantages of a sole trader and company depending on your business goals and resources. While a sole trader is more straightforward and less costly to set up, forming a company may offer more protection to your personal assets and establish more credibility with your clients and suppliers.
Whatever structure you choose, you’ll need to make sure that you are familiar with the legal and regulatory requirements for that structure. By understanding the differences between a sole trader and a company, you can make a well-informed decision and set your business up for success.