Setting up a business in Australia is not easy. From deciding the right business entity to processing requirements, the entire process can be overwhelming. Among other things, you must ensure the entity you will establish is ideal for your business goals, as it will greatly impact your financial strategies, tax planning, and compliance obligations.
If you want to set up your business with full control, little paperwork, and simple tax filing requirements, being a sole trader is suitable for you. If you want limited liability, more options to raise capital, and better protection for your business, company registration is a solid choice.
Want to make sure you’re making the right choice? Read on to know the advantages and disadvantages of being a sole trader vis-à-vis company registration in Australia.
- What is an ABN sole trader in Australia?
- Pros and cons of ABN sole trader
- What is company registration (Pty Ltd) in Australia?
- Pros and cons of company registration
- At a glance: ABN sole trader vs. company registration (Pty Ltd) in Australia
- Which structure is ideal for your business?
What is an ABN sole trader in Australia?
An ABN sole trader is a business entity owned and operated by a single individual with an Australian Business Number (ABN), a unique government-issued 11-digit number that allows them to do business in Australia. The ABN is used to identify their business to customers, suppliers, and other businesses. It is also used for tax filing and compliance.
An ABN sole trader has no separate legal entity from the individual owner who shall have full control of the day-to-day operations of the business and incur all its debts and liabilities.
Pros and cons of an ABN sole trader in Australia
Pros of an ABN sole trader
With a relatively simple business structure, an ABN sole trader has many advantages, including:
Low setup costs
The registration fees and ongoing compliance costs for a sole trader in Australia are inexpensive and considerably lower than other types of entities. All you need to get started is to register your business name, apply for an ABN, and register for Goods and Services Tax (GST).
Easier tax filing
With a simple business structure, its tax filing requirements are fewer than other entities. The income generated by the business is treated as individual income so there is no need for separate tax returns.
Full control over how the business will operate
You will be responsible for all aspects of the business, having total control over the daily operations, managing of finances, and growing the business.
Cons of an ABN Sole Trader
The simple structure of an ABN sole trader also gives it several drawbacks, which include:
Since the sole trader and individual owner are treated as one and the same, you will be personally liable for any debt or liability that the business will incur. Any financial difficulty your business will encounter may extend to your personal assets.
Limited access to funding
It is more difficult to secure loans from traditional lenders when doing business as a sole trader. Since sole traders lack a formal business structure and have personal liability, they are viewed by banks as high-risk and are less likely to secure funding.
Limited tax benefits
Sole traders have limited tax benefits and are not eligible to apply for certain tax deductions, tax relief, or tax credits granted to other entities.
Lack of separation between personal and business finances
Perhaps the most serious disadvantage of doing business as a sole trader, this lack of separation makes it difficult to monitor business expenses while making sure personal expenses are kept in check.
What is company registration (Pty Ltd) in Australia?
As the most common type of entity for company formation in Australia, a proprietary limited company, or Pty Ltd, is a privately-held business entity with a separate legal personality from its members or shareholders. As such, their liability is limited to the amount of capital they inject into the company.
A Pty Ltd is governed by the Australian Securities and Investments Commission (ASIC) and must comply with the rules set by the Corporations Act 2001. They are required to file annual statements with ASIC and lodge tax returns with the Australian Taxation Office (ATO).
Pros and cons of company registration (Pty Ltd) in Australia
Pros of company registration (Pty Ltd)
Owing to its many advantages, a Pty Ltd is common among small and medium-sized businesses in Australia. Its many benefits include:
Since a Pty Ltd has a separate legal personality from its shareholders, the latter will not be held personally liable for any debt or liability that the business will incur.
More options to raise capital
A Pty Ltd can raise capital by creating and issuing shares, which is not legally possible with a sole trader. As an entity with a formal business structure, it is seen as more credible by lenders and can secure funding to support its operations and plans for growth.
Eligible for a multitude of tax benefits
Many tax benefits are available to Pty Ltd companies, from audit relief and claiming tax deductions for expenses to government grants and tax credits for certain tax types. Subject to eligibility, you can claim these tax perks to minimise your tax burden.
Unlike sole traders, a Pty Ltd will continue to exist even after the death or resignation of its shareholders or directors.
Cons of company registration (Pty Ltd)
With a more complicated structure, a Pty Ltd also has its shortcomings. Its disadvantages include:
Higher setup costs
Due to its complex business structure, a Pty Ltd is subject to more regulatory requirements and higher registration fees. Depending on the industry to engage in, additional requirements for registration may be necessary.
More paperwork and compliance obligations
Pty Ltd companies are required to abide by the rules set out in its constitution as well as the regulations set forth by the Corporations Act 2001. They are also required to file annual financial statements to ASIC and keep their financial records for at least 7 years.
Since they are required to abide by their constitution and the Corporations Act, they are limited in their ability to adapt to new changes in the market or take on new opportunities for growth.
At a glance: ABN sole trader vs. company registration (Pty Ltd) in Australia
|ABN Sole Trader||Company Registration (Pty Ltd)|
|Ease of set up||Easy to set up; only requires the following to get started: ||Has a more complex structure and lengthy setup requirements. The setup process include: |
|Startup costs||Generally inexpensive, but costs may include: ||Has higher startup costs, which generally include: |
|Protection from liabilities||Owner is personally liable for the debts and liabilities incurred by the business; no separation between business assets and personal assets||Owners are only liable to the extent of their share capital; but directors can be at risk if the company can’t pay its debts|
|Control over the business||Owner has full control over the business||Company decisions have to be in accordance with the company constitution or replaceable rules. Owners have the obligation to act in good faith and for the best interest of the company.|
|Tax benefits||Can claim a deduction for salary, wages, and allowances paid to employees; cannot claim a deduction for money or assets taken from the business for personal purposes||Can avail of multiple tax benefits, including:
Which structure is ideal for your business?
Need more reasons to ultimately decide which structure to choose? We at Company Set Up Australia understand how difficult it can be to know what works best for your business goals. That’s why we’re ready to help you get the ball rolling for your new Australian business. Talk to our experts today!
To register as an ABN sole trader in Australia, you need to process the following:
- business name
- Australian Business Number (ABN)
- Goods and Services Tax (GST)
No, you do not need to register with ASIC if you will be conducting business under your name. Your ABN will be sufficient to identify your business to your customers, suppliers, and other businesses.
The setup requirements for a Pty Ltd in Australia are as follows:
- registered company name
- registered office address
- corporate officeholders (at least 1 resident director)
- company secretary
- company constitution
Registering a Pty Ltd in Australia can take 4-8 weeks, provided all required documents are presented. If additional requirements are requested, the process can take longer.
Venus Angelli David is a Digital Copywriter with over 7 years of experience writing about business, recruitment, tech, and immigration for consulting firms in Australia, Singapore, the Philippines, and Indonesia. She loves coffee, cats, and yoga.