Company v Sole Trader: What's The Verdict?

Nathalie jones valiant finance

Nathalie Jones

Tuesday, 01 March 2016

When registering your business, you need to decide which business structure you'll adopt. There is no right or wrong answer here. You’ll need to carefully consider your business and industry, and adopt the structure that is most appropriate for you. One of the most important aspects informing your decision is whether to register yourself as a sole trader or a company. So, what’s the difference between the two?

A Proprietary Limited Company (Pty Ltd) is a business structure with at least one shareholder (owning the company) and one director (running the company) — which are often the same person. On the other hand, a sole trader is a structure where the person operating the business is the individual legally responsible for all aspects of the business.

Essentially, a company structure has many advantages over a sole trader structure. Let's look at why:

Tax

  • As a company, you will be taxed as a separate entity under a company tax rate of 30%. The revenue of the business will be taxed at this rate, and then kept in the business to assist growth unless you decide to distribute the income to the owners/shareholders.
  • As a sole trader, you will be taxed as an individual, with your business simply being an extension of your personal income. Your business profits will be aggregated with any other personal income and you will pay tax on that sum.

The key reason that a company structure is preferable here is that it offers flexibility. If your business becomes quite profitable, you have the option to keep the profits within the business — in order to allow your business to grow. Alternatively, as a sole trader, the revenue is added to your yearly personal income (potentially being taxed at a higher rate as you move into higher tax brackets). A company structure gives you more control over your tax outcome.

Liability

  • Under a company structure, the company is taking out a loan, rather than you as a director. In the case of default, the lender can go after the company’s assets but your personal assets are protected. An important exception to this is where you have signed a director’s guarantee over the loan.
  • Comparatively, as a sole trader you secure debt under your personal assets (as the business and the owner are treated as the same thing) therefore your creditors will be able to pursue your personal assets in order to recoup the losses if you default.

Your personal possessions will be more secure under a company structure, provided you haven’t signed a director’s guarantee.

Raising money by offering equity

  • As a company, you are able to raise money by offering equity in the business in return for investment.
  • Sole traders are unable to raise funds in this way as the business is considered part of the owner’s personal assets.
  • A sole trader may want to offer a partnership in their business, but even this has the disadvantage of requiring personal property as security. A company structure provides a clear mechanism for scaling the business, if that’s your longer-term goal.

Transfer of ownership

  • A company has ‘perpetual succession’ which means that the business can continue to operate even if the founders pass away, due to the fact that the business is seen as a separate entity.
  • Transferring ownership as a sole trader is a lot more difficult. Usually, when the owner passes away, so will the business. Given that the business is tied to the owner’s personal assets, they are subject to whatever is dictated by the owner’s will.

Long story short - the transfer of ownership is always easier under a company structure.

Paperwork & establishment costs

  • As a sole trader, you only need to pay for business name registration and the renewal every 1-3 years.
  • Setting up a company requires business name registration, as well as company registration and reservation of a company name. Each of these have varying costs associated with them, and company registration can be expensive.

Paperwork is never fun, and registering a company requires a significant amount of paperwork. The establishment costs for a company are much greater than that of a sole trader. Conversely, the setup time and expenses associated with establishing yourself as a sole trader are relatively low.

The verdict?

While registering a company involves more paperwork and have greater upkeep costs than registering as a sole trader, being a proprietary limited company has many advantages. It is  favorable in the areas of tax, debt security, equity investment and transfer of ownership . In the longer term, a company structure is preferable on many fronts. Keep in mind that some lenders are reluctant to deal with sole traders as they prefer the security and organised structure that a 'company' provides.

If you're currently operating as a sole trader, it may be a good idea to seek independent accounting advice prior to any change to your structure.


Nat is the Communications Manager at Valiant Finance. She has a double degree in Journalism and Law, and a background in the fintech space, hailing from Asia's largest fintech hub, Stone & Chalk.

Related Posts

How To Get Your Business Set-up on Social Media

Want to reach your customers online? Are you ready to digitise your small business? First up: get smart about social.

How To Handle Complaints With The Service Recovery Paradox

Don't let angry customers stay angry. Protect your business' reputation with these simple tips and tricks for delivering exemplary customer service.

How To Find The Right Loan For Your Small Business

Every business is unique. Every business loan is different. What features are most important to you? Consider these 4 things before applying for finance.

Ready To Take Your Business Global?

Have you explored your trade finance options? Premiering your business on the world stage may be within reach.

Don't Get Caught Out: Top Tips For Smart Inventory Management

Your guide to smart inventory management for every season.

3 Great Ways to Drive Sales Through Customer Loyalty

Get more customers and keep them. Here's the low-down on setting up your very own customer loyalty program.

How To Compare Business Loans Across The Market

You've explored your business finance options. What do you do next? How can you be sure you're comparing loans effectively and getting the best deal?

How To Make Great Hiring Decisions For Your Small Business

Want to expand your team but don't know where to start? Here's our guide to hiring great employees, featuring tips from industry leaders.

How To Develop Your Unique Selling Proposition

A Unique Selling Proposition (USP) is fundamental for any business looking to grow. Learn how to develop your USP and stand out from the crowd.

Here's What Working Capital Can Do For Your Business

With so many business finance options to choose from, how do you know whether working capital is right for your business? Start by reading this.

Time To Refinance? Here's What You Need To Know

Are you ready to refinance? Reviewing your business loan every 2 - 3 years can save your SME a lot of money. Here's what you need to know.

7 Tips For Managing Business Debt

2018 is your year. Here are 7 quick tips and tricks to get back in the driver's seat when it comes to battling business debt.

19 Business Funding Mistakes To Avoid

Improve your chances of locking down the perfect business loan. Here are 19 business funding mistakes to avoid when you're applying for commercial finance.

12 Business Set-Up Costs You Need To Know About

Setting up a business is hard enough, without getting stung with unexpected costs. Here are the things you should be thinking about before you dive in.

5 Must-Ask Questions When Applying For A Small Business Loan

Getting the best rate is all about asking the right questions. Have you done your research? Here's where to start and why.

Part 2: Claiming The R&D Tax Offset

"Ok, I'm eligible for the R&D tax incentive. But how do I actually claim it?" Here's what you need to know.

Part 1: Are You Eligible For The R&D Tax Incentive?

You could be missing out on a tax offset of 45 cents in every dollar. Check your eligibility for the R&D tax incentive today.

Debt or Equity: What's best for your business?

Need to raise cash for your business? We explore the use of debt versus equity, and how to decide which one is best for your business.

Are The Rewards On Your Business Credit Card Worth The Higher Fees?

Reward points can add value to your business, but it's not one-size-fits all. Here's what you need to know.

Company v Sole Trader: What's The Verdict?

Here's the million dollar question: will you start up a company or will you establish yourself as a sole trader? Get the full story.

10 Lessons We Learned From Starting Our Small Business

Valiant Finance is a small business dedicated to supercharging the growth of other small businesses through access to funding. Here's what we've learned.