Business Investment in Vanuatu | Business

Navigating through the decision-making process of “sole trader vs company” for your business structure can be confusing because both have pros and cons, and a business has its own individual needs to prioritise.

Most people initially choose to start as sole traders. However, as they start to earn more and have to pay more taxes, they often find themselves contemplating whether a different structure might be more beneficial.

So, in this blog, we’ll take a closer look at the differences between a sole trader business structure and a company business structure so you can determine which is better suited to your business’ current and future goals and circumstances.

What is a Sole Trader?

A sole trader is an individual runs a business. They are the only owner responsible for controlling and managing the business. This means all decisions, from day-to-day operations to strategic planning, rest on their shoulders, offering complete autonomy and control.

While a sole trader structure can be affordable and simple, it can be riskier because the owner is personally liable for the business. This structure has no legal distinction between the owner and the business.

Consequently, any debts or liabilities the business incurs are directly attributed to the owner. If the business faced financial struggles or legal issues, the owner’s personal assets, such as their home or savings, could potentially be at risk of settling business debts.

Advantages of Being a Sole Trader

Some advantages of a sole trader structure include the following:

Less expensive to set up and maintain
Only one tax return is required
The business is entirely under your ownership, control and management
Businesses generating a low income can receive tax benefits
You don’t need to pay worker compensation if you don’t employ staff
You don’t need to make super contributions on your director’s drawings

Disadvantages of Operating with a Sole Trader Business Structure

Along with the advantages, you have to consider the following disadvantages:Your personal assets can be at risk if the business goes into debt

Less flexibility for tax planning
Businesses generating a high income have fewer opportunities to reduce taxes.
Retaining employees of a high-calibre can be difficult.
Limited capacity for growth because you can’t employ partners or co-founders
You keep all profits
The business ends when you pass away or retire

What is a Pty Ltd Company?

A proprietary limited company, often abbreviated as Pty Ltd, is a business structure type where it is its legal entity. This means it has rights and responsibilities separate from those who own or run it.

The business can enter into contracts and legal relations, have up to 50 shareholders and shareholders are not held responsible for company debts. This is because the company has its legal personality, which means it can own property, sue, and be sued in its name. So, the liability of the shareholders is limited, which essentially means their personal assets are protected from the company’s debts and liabilities.

Establishing a company can be more expensive, but it offers better protection and flexibility as a separate legal entity regarding tax. The costs associated with setting up a Pty Ltd company include registration fees and ongoing regulatory compliance, which might involve additional administrative work and expenses.

However, the benefits, such as the protection mentioned above for personal assets and potential tax advantages, often outweigh these costs for many business owners. Having a company can also give customers and potential investors a perception of credibility and permanency, which might be particularly beneficial in certain industries or markets.

Moreover, the tax flexibility arises from the company being taxed at the corporate tax rate and having the ability to access various tax concessions and incentives that might not be available to sole traders.