A sole trader and partnership 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 or Partnership (2024 update: currently priced at $98 AUD for 3 years)

You will be lucky to get change from $5,000 if you set up as a Company. The business registration costs are higher at $576 to register the business and $98 to register the name, but the bulk of the cost is legal and accountant fees to help you set it up correctly. I imagine you could do this yourself but I highly recommend you leave this to the professionals because there is a lot of things that need to be done correctly.

And the financial reporting requirements for a Sole Trader are less than a Company which reduces the bureaucracy. 

Note: A partnership does require more reporting than a Sole Trader including the requirements to submit a Partnership Tax Return Form (because a Partnership has a a separate TFN to your personal individual TFN).

BUT WAIT!

Do not just jump straight into setting up as a Sole Trader because it is cheaper and easier. We still need to look at risk and taxes.

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.

Of course insurance can cover you for most eventualities so you can minimise the risk correctly.

The partners in a Partnership are also equally liable.

As a Company, your personal assets are protected if something was to go wrong with the business. So this as an additional layer of protection beyond your selected insurance.

There are a few cases where being a Company still doesn't protect you as the director of the business, and your personal assets. These are only if you are do something fraudulent or illegal (e.g. trading while insolvent) or have outstanding payments to employees. 

If we are looking at risk alone, you would always go with a Company structure due to the extra level of protection.

But does the benefits outweigh the higher costs for registering and running a Pty Ltd? 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 to your personal assets.

I bet at some point you have heard a story around someone who set up as a Company and is saving tens of thousands dollars a year through tax savings. 

Here are some facts around the myth of tax savings via a Company.

As a Sole trader, any business income generated is taxed at your personal rate.

For example, if your Business is going to be your primary source of income and you earn $135,000 each year you will pay around 23% tax (based on the 2024 ATO tax brackets). This is less than the Company flat tax rate of 25% and means there is no tax benefit for registering your business as a Company.

If you business is going to be a Side Hustle and you already earn above the 45% tax bracket with your main job ($180,000 in 2024), then all the additional income of your Side Hustle will be taxed at 45% as a Sole Trader.  This is greater than Company flat tax rate of 25%.

As mentioned a Company has a flat 25% tax rate for most small businesses. This means every dollar of income is taxed at 25%, regardless if you earn $100,000 an $1 million.

If you take the example of your new business being a Side Hustle and you are already earning enough to be taxed at 45%, you could quickly come to the conclusion that you can get 20% tax saving for every dollar your earn as a Company (45% - 25%). The tax savings could easily pay the higher set-up costs of a Company.

But this isn't entirely correct and there are a lot grey areas you need to consider first.

Grey Area - Personal Services Income

One of these areas to consider 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.

If you are selling you knowledge and skills (consulting / coaching) then the revenue will probably be classed as PSI and therefore you get no Company tax benefits.

If you are selling a product then this will probably not be classed as PSI and then revenue will be taxed at the Company rate of 25%.

Grey Area - 80/20 rule

Another area is the 80/20 rule. If 80% or more of all your revenue comes from one client, then ALL your revenue is taxed at your personal rate. So if you are setting up a business and have one major client providing 80% or more of your revenue, then you will not enjoy any of the Company tax savings, regardless if the revenue is $50,000 or $500,000.

A final point is you only get taxed on your business income. This is the revenue generated minus the costs accrued. It is common to not make a lot of money in the first years of your business as you establish a brand and reputation.. so their won't be much income to be taxed on regardless if you are a Sole Trader or Company. This makes the tax savings element not the critical decision driver.

If you intend to spend a lot of money on researching and developing your product or service then you may be entitled to a tax incentive. This equates to getting roughly 50c to every dollar you spent, so you get half back. But Sole Traders cannot get access to this specific grant.

If you want access to the R&D tax incentives, then the only option is to become a Company.