This is AMM's second guest post! I do not often allow guest posters, this means you know when there is one it is of quality. Today we touch more on the business side of AMM and discuss the move for entrepreneurs from sole trader to company! Getting started in business usually means setting up a sole trader structure from day one. The simple and cost-effective nature of this business structure is what makes it so appealing to entrepreneurs across Australia, as well as the full control it gives the owner. The downside to this, however, is that operating as a sole trader means you as the business owner are personally liable for every aspect of your business, including debts – meaning personal assets such as your home or car may be used to pay business debts.
SO HOW DO WE COUNTER THIS?
If you’ve been in business for a while and are looking to grow, it may be worthwhile looking at changing up your business structure. This can limit your personal liabilities; allow you to bring in more employees; protect your business in the event of your illness or death; and even help you involve third parties willing to inject funds into your business to promote further expansion and growth.
Income from a sole trading business is treated as your individual income, therefore you have full access as the owner to draw on all funds in any business account. Holding a business bank account separate from your personal account is not compulsory for a sole trader (but is generally advisable). Also, maintaining complete and accurate receipts and records as required allows you to claim a tax deduction for any costs incurred in operating your sole trader business.
Conversely, any income earned by a company belongs to the company, and a separate bank account is mandatory when operating in this type of structure. The directors of a company may be paid a directors fee (or wages), but may not withdraw money from the company’s bank account as drawings. Similarly, shareholders in a company receive income in the form of dividends.
A common reason people get into business is to be their own boss – so it makes sense that sole traders make all the decisions and have full control over their business operations. However in a company, shareholders appoint directors to make those key decisions, and in situations where more than one director is appointed, all directors have a say in how the business is run. They will also be subject to the rules in the Corporations Act 2001. Shareholders may vote on major decisions about the company, usually in accordance with their shareholding amount. In private family companies, the directors and shareholders may be the same or associated persons, so a degree of control is still maintained.
As a sole trader, you are personally liable for all aspects of running the business, including financial and tax debts, and your liability is not limited in any way. Simply put, your business and personal assets are on the line if significant business debt builds up. A company, on the other hand, is treated as a legal entity, separated from its shareholders, and therefore liability is limited (generally to the extent of its assets). Shareholders liability is limited, and they are not responsible for debts incurred by the company (except for any unpaid capital on shares issued to them).
Other things to consider
There are costs involved in both forming and running a company. Companies are more closely regulated than a basic sole trader structure, requiring a higher level of record keeping and periodic bookkeeping/accounting to ensure continued compliance. The Australian Securities and Investment Commission (ASIC) also charges an annual fee to all registered companies.