Following my last post on Sole Trader Vs Company I:

Either sole trader or company, now I have made the decision. What exactly should I do differently though?

Firstly, how to access your money.

Sole trader – the good news is that you can withdraw money freely without any restrictions and you don’t have to set up a separate bank account, however, it is recommended to do so for easier tracking of business income and expenses, which means less unnecessary bookkeeping costs on untangling threads of business and private.

Company – sorry your company is NOT you. A separate company bank account is compulsory, and you, as an individual, can not simply withdraw money from a company bank account. When you do withdraw for personal use, the amount has to be accounted in one of the three forms below:

  • Wages or Director Fee – to be employment income in your personal tax return
  • Dividend payment – dividend income in your personal tax return
  • Director’s loan which is also called Div 7A loan. It is a loan therefore you have to pay it back. Interest applies if not fully repaid before company’s lodgement day for the year when the loan is made. And the maximum term is normally 7 years.

And of course, taxes.

Sole trader – ALL IN ONE. You are not separated from your business, therefore only one personal tax return is required. Your business profit is calculated by filling out a business income and expenditure schedule, and the resulted profit is simply added on top of your other assessable income, taxed at individual marginal rates. Check out ATO income tax rates with link: https://www.ato.gov.au/rates/individual-income-tax-rates/
Company – company exists as an independent legal entity, and a separate company tax return is required. Net profit is taxed at 30% generally, 27.5% however, for small business entities since 2018 financial year.

Ok I know this sounds awful, but still, this is a must know.

So, what if you or your company defaults on debts or fails to pay creditors?

Sole trader – very unfortunate for you. All your creditors (eg. employees, banks, suppliers) have rights to all your personal assets for fulfilling what they are owed.

Company – in general, the company itself is liable for all its debts. That means, in the case of insolvency, the company’s creditors can’t touch your personal assets. However, as the director of the company, you are still personally liable for pay as you go (PAYG) withholding and superannuation debts. Further, you are also personally liable for the business loans that you provided personal guarantee for.

An important tip for companies:

DON’T forget to lodge and pay ASIC annual review by the due date, as their penalty charges are ridiculously high and NOT tax-deductible.

Not sure which structure to take on? Start with my post Sole Trader Vs Company – I.

Need professional advice? We are here to help.

 


Disclaimer:

Please note that this post is intended to be a general guide only, and should not be seen to constitute legal or tax advice. Where necessary, you should seek a second professional opinion for any legal or tax issues raised in your personal or business tax affairs.

Emma Zhao

Emma Zhao

Chartered Accountant | Registered Tax Agent | SMSF Speacialist™ emma@sencilloaccounts.com.au