Sole Trader or Company, which one should you chose?
Sole Trader or Company, which one should you chose?
You will soon come to this crossroad when you start up your new business.
To help you get a better understanding, let us look at this question through three lenses: costs, risks and taxes.
Note: this is deliberately simplified to give you a quick overview.
Costs of setting up a Sole Trader or Company.
A sole trader is about 50 times cheaper to set up than a Company.
You will get change from $100 if you register your business as a Sole Trader.
You will be lucky to get change from $5000 if you set up as a Company. The business registration costs are higher but the bulk of it are legal and accountant fees to help you set it correctly.
BUT WAIT!
Do not just jump straight into setting up as a Sole Trader. We still need to look at risk and taxes.
Risks being a Sole Trader or Company
Sole trader
As a Sole Trader, you are your business.
All your personal assets are at risk if something was to go wrong with your business that leads to you needing to pay a debt (bankruptcy, being sued etc).
Your house and car could be used to pay off this debt which is outside your control.
Company
As a Company, your personal assets are protected if something was to go wrong with the business.
There are a few cases where this isn't the case and they can still come after you as the director of the business. But these are only if you are do something fraudulent or illegal (e.g. trading while insolvent) or have outstanding payments to employees.
Now, which one should you chose?
It all comes down to your tolerance of risk and what your side business is doing. Ultimately its your level of comfort and what helps you sleep better a night.
Selling t-shirts? The risk of something drastic is low.
Consulting on a high risk construction project? The risk picture is different and you may want that extra level of protection.
Tax implications of a Sole Trader or Company
Sole trader
Any business income generated as a Sole Trader is taxed at your personal rate.
If you are already at the 45% tax bracket with your main job, then all the income of you side business is taxed at 45%.
Company
A Company has a flat 25% tax rate for most small businesses.
But before you go thinking you can get 20% extra for every dollar your earn as a Company, there are grey areas you need to consider.
One of these is Personal Services Income (PSI) and it’s a minefield.
If your revenue is deemed PSI then you get taxed at your personal rate rather than the Company rate, regardless if you set up as a Company.
There is so much on this topic alone that I won’t delve further here beyond giving some simple examples.
Selling you knowledge and skills - Probably classed as PSI
Selling a product - Probably not classed as PSI.
Final thought.
You are not stuck with your decision. You can always set up as a Sole Trader initially and then change to a Company as your business grows.
