Difference Between Sole Trader And A Company Tax

In Australia, when you provide your business with a transformative step, it will transform your dreams into reality. Being a company or a sole trader stands out as the best way to set up your business. But when it comes to deciding, which option is the best for you, might not be that easy. There is a massive difference between a company and a sole trader. 


Each of them has its own benefits, approach and performance. If you want to know the actual difference between these two structures, you need to gain in-depth information about each of them. Doing so will enable you to gain a clear idea of how both of them will have an impact on the regular within your business. 

Company vs Sole Trader: What’s the difference?


Before you take the step of opting for a sole trader or company, you must understand how exactly they are different from each other. For that, you can take the information below!

  1. Sole Trader


Within the nation of Australia, a sole trader is pointed towards an individual who is self-employed and operates and owns a business. Tradespeople, such as gardeners, plumbers, and electricians are said to operate sole trader businesses and also do multiple freelance consultants. This particular business structure stands out to be pretty popular because it’s easy and simple to set up. 


As a sole trader, you need to file your Sole Trader Tax Return for every tax-day, and you are free to hire a professional accountant for the job. Operating a business as a sole trader is pretty easy, and all you need to do is remember that you and your business are one. 

  1. Company


A company is pictured as a separate and legal entity, and it carries the same rights just like a natural individual and can incur debts, sue and get sued. The owner’s or shareholders of the company can limit their personal liability. On the other hand, they are not liable for any debts of the company. 


The business structure of your company matters greatly because it comes with a continuous impact on how much financial risk you are exposed to and how much cash you are eligible to take home.

Understanding the benefits of being a sole trader


As a sole trader, you will come across plenty of benefits and know what they are, check the information provided below. 


  • Under a sole trader business, you will be the boss. 

  • You get to keep all the profits, no profit shares or dividends. 

  • The cost for registration is pretty low.

  • You will have the power to wind up the business.

  • As a sole trader, you will enjoy plenty of privacy. 

  • Operating and establishing your business is simple. 

  • If the situation changes, you can change the legal structure later on.

Benefits you will receive for owning a company


When you establish and run a proprietor limited company, listed below are the following benefits that you will get. 


  • Owning a company will give you the freedom or right to be the only decision-maker and get to access the experience and knowledge of all the co-directors. You can do so when you are operating multiple shareholders and directors. 

  • When you have shareholders, it will become a lot easier to increase the capitals. 

  • You can transfer either half or full ownership to an entity or business.

  • It will be much easier for you to expand because you will have the power to operate a group of Companies. You will also get the chance to offset the losses from one company against the profit that got taxed for another firm.

  • Companies are often perceived as more serious by outsiders. It’s all because the process of requirements and setup that gets involved for continuous trading is expensive. 

  • The taxation on profits is pretty beneficial.

  • The liability is limited.


How sole traders are taxed?

When you are operating as a sole trader, the money you get to earn through your business is treated as your personal income. So, during the tax time, all you have to do is include all the expenses and business income within the business section of the individual tax return, which will arrive at your tax return. You are also eligible to claim a cost incurred in operating your business along with super contributions in the form of a tax deduction.


Even though you have the freedom to withdraw from your business as personal drawings, you cannot claim your own wages as a tax deduction. To know more, you can consult with a professional accountant Perth on such matters as they can provide you information related to tax with no hassle. 

How are companies taxed?

Companies are said to pay tax through their taxable business income, which stands out as the income net of expenses. You cannot take out the money in the form of personal drawings, because the company will pay you wages but might deduct them as business expenses. The tax rate of a company in Australia is between 27.5% or 30% and depends entirely on the type of company you run or operate. This particular tax rate gets applied to each dollar your business makes. 


It’s because companies in Australia are not eligible for tax-free thresholds. If you think only individuals get to receive the threshold but companies do not, you are wrong. This is because the individual tax reach can climb up to 47%. The best structure from the tax perspective will depend entirely on your business specifics. 

What are the liabilities of a company and sole trader?

For sole traders, the personal assets will not stay protected through a business structure. For such reasons, you are personally liable for all parts of the business, which includes contracts, debts and liabilities. When your hire staff or workers, you will be solely responsible for the Super Guarantee or SG contribution obligations and PAYG withholding obligations. 

On the other hand, when running a company, all your assets are not protected automatically. In general, when you comply with all the legal obligations as the Director, the company becomes liable for the debts. In other words, the liabilities and debts of the company will get paid by the company itself. 


Ending Note


Whether you choose to establish a business as a proprietor-limited company or as a sole trader, it will depend on you and the business needs you have in store. If you have doubts or are confused, you can consult with an expert like Palladium Financial Group.