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One of the most crucial financial decisions that a business owner makes is to select the appropriate business structure. The decision to be a sole trader or company not only has an impact on how you conduct your own business but also on the amount of tax paid, personal liability, and your compliance levels.
It is essential to know the most critical tax differences between the two structures to carry out financial planning effectively. Regardless of the type of accountant you hire, be it a sole trader accountant or a tax accountant Perth, professional advice will help you keep your business afloat and in the best tax position. In this regard, we will first understand the differences in the tax slabs of proprietors and companies. Let’s have a look!
The most common and easiest form of business ownership in Australia is a sole trader. It gives a chance to a single person to own, to manage and control everything in the business. Tax-wise, the business and the individual do not differ in any legal sense. This implies that the personal income of the owner is considered to be the income of the business.
In the case of sole trader tax vs company tax, individual marginal rates are paid by the sole trader; this can range between 0-45 percent, and this is subject to the whole income. Although this can be advantageous to the low-earning earners, the high-earning earners are usually forced to contribute more tax than in a company structure.
To reduce your taxable income, a professional accountant working on behalf of sole traders may assist you to take valid deductions, handle your GST, and ensure that the income tax return is prepared correctly. They would also be able to advise you in terms of moving to a company structure as your business expands.
A corporation, enterprise or company is an independent body and a distinct legal entity of its owners (shareholders). This implies that it is capable of owning resources, of making contracts and is liable for its own debts and taxation. The corporate tax rate is set at a flat rate in Australia and may be less than the individual rates.
Base rate entities are generally subject to the current company tax rate of 25 percent, whereas bigger companies pay 30 percent. This is among the significant variations between the sole trader tax and the company tax. The reduced tax rate may be more appealing as it will enable a corporation to have decent profits.
There are more complex accounting and reporting requirements to file a company tax return in Australia, which also include proper financial records and annual corporate tax lodgment to the ATO.
By hiring a professional corporate tax accountant, one is likely to avoid violating these requirements and can also find areas of tax savings.
There are several aspects under which the tax slabs differ. The difference between sole trader tax vs company tax is as follows:
The absence of an expert accountant for sole traders can assist in calculating which structure gives the most effective tax result in your case.
The form of structure will have a direct impact on your financial responsibility and personal liability. Being a sole trader, you are directly responsible for the business debts and legal obligations. This implies that your personal resources can be jeopardised in case the company has financial troubles.
Conversely, limiting liability is provided by a company. The liability of the shareholders is usually limited to the value of their shares. Nevertheless, there are some breaches of corporate law for which directors can still be personally liable.
When it comes to taxation, sole proprietors might find it easier and less costly in terms of compliance. Nevertheless, corporations are more flexible in terms of tax planning, income distribution and superannuation contributions.
Engaging an accountant for sole traders can assist you in balancing these trade-offs and strategising accordingly, depending on the level of income and growth path of the business.
The decision between a sole trader and a company is based on the size of the business, risk exposure and income level.
A sole trader form is best when:
A company design can be enhanced in the following cases:
A sole trader accountant may assist in deciding when it is financially viable to incorporate. Similarly, a corporate tax accountant may provide advice on the restructuring, so that your business pays reduced taxes and enjoys greater protection over assets.
There are obligations by both sole traders and companies to the Australian Taxation Office (ATO). Nevertheless, the two have vast differences in the complexity of compliance.
In the case of sole traders, ATO requirements are not very complicated. You need to acquire an Australian Business Number (ABN), maintain good financial records, and submit your annual personal tax returns with business income. An accountant for sole traders will make sure that your deductions are valid and your GST reports (assuming you are registered) are correct.
Companies are subject to wider compliance requirements. This includes:
With the complexity of company tax filing and filing corporate tax, employing a company tax accountant or a tax accountant Perth will see that all the requirements have been met correctly and on time. Noncompliance may result in fines, interest, or audits.
A sole trader accountant takes care of cash flow, prepares quarterly BAS statements, and determines deductions such as home office and vehicle expenses. A company tax accountant provides strategic tax planning advice on the distribution of profits, imputation of dividends and corporate structuring.
Tax advisors help to file taxes, prepare financial statements and plan for expansion or change of structure. They explain the differences between tax returns and refunds, which can be used to make informed financial decisions and focus on the development of a sustainable economy.
To make the correct structural decision about your business, it is critical to understand the sole trader tax vs company tax difference. Sole traders are also easy to comply with and have fewer compliance needs, although they are likely to pay higher taxes and be personally liable. Registered entities protect assets, reduce taxes, and incur more administrative liabilities.
Hiring an accountant, be it an individual or business, is essential in choosing the tax-efficient form of entity whilst adhering to the laws of the ATO. A corporate tax accountant can maximise deductions and also make sure that everything is fine as your business advances. To get expert advice, consult a competent tax accountant to work through the intricacies of the Australian taxation system with ease.
