Home – New Forums Starting your journey What would be the advantage of doing business as a sole trader

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  • #968368
    louisapple
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    What would be the advantages of doing business as a sole trader over company, except the limit liabilities and cheap set up and maintain? Any differences in terms of deduction?

    #1032750
    DS_BVS
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    Hi there,

    One of the most fundamental differences is that a company is taxable on every dollar of taxable income, whereas a sole trader has the advantage of a tax free threshold and in the lower taxable income levels it results in a lower level of tax payable. The usual business inputs are deductible to both structures although you have to watch Fringe Benefits Tax with a company if there is private use of say a vehicle. A sole trader also can access more Capital Gains Tax concessions than a company and this is usually of advantage unless the gain is very large.

    As a sole trader you may not have the flexibility to pay yourself a salary and make super contributions as with a company. On the other hand companies can have a problem in alienating (splitting) personal exertion income that would normally be attributed to an individual.

    Loans from a business by a sole trader are usually treated as drawings whereas with a company there is the application of Div 7A, which can deem loan funds from a company to be a dividend. On the other hand a company can pay franked dividends if it has paid tax, so a tax credit is attached that can sometimes eliminate tax payable on those dividends.

    The point here is that there are benefits for both structures and if you expect a low taxable income, don’t have the need for limited liability and don’t intend to attach a super fund to your entity, then a sole trader arrangement works fine. Set up a reserve account for future tax and you should be covered.

    Hope this helps.

    #1032751
    Business Coach
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    Advantages of being a sole trader

    Hi

    The above information is good and I agree with the tax info. Too many people think that they pay less tax as a company, which isnt always true. If you manage your finances a sole trader can work well.

    Another reason why some people dont like sole traders is due to the higher exposure of liability when things go wrong. However, even running a company doesnt prevent you, as the director from being liable. Especially if laws are broken in the first place that could pierce the corporate veil.

    A big advantage of being a sole trader is the flexibility to make decisions without waiting for the formal process to start/end. Companies have legal obligations in reporting and operating according to their articles.

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