Your choice of structure will affect the way you do business in several ways, from the insurance you’ll need to the taxes you’ll pay. No matter which you choose, proper protection of your public liability, whether as a sole trader or a company, is essential to protecting your income, reputation and assets.
What is a Sole Trader Structure?
Sole traders are businesses that are typically owned and operated by a single person, meaning that they are solely, legally responsible for all aspects of the business. This structure commonly includes tradesmen and other individuals who contract their services out.
Operating as a sole trader leaves you in a state of ‘unlimited liability’. This means that your money and assets, including things such as your car and house, can all be at risk if your business is required to pay damages. To limit this liability, it is important for sole traders to be correctly insured to protect their assets.
Sole trader insurance is not an insurance type in its own right, but is usually a combination of different covers, such as public liability, personal sickness and income protection insurance. These covers not only protect sole traders from the risks of unlimited liability but can also provide cover in the event that they injure themselves or otherwise can’t work.
Operating as a Sole Trader
The primary benefit of operating your business as a sole trader is that it is a cheaper and easier option, which is perfect for those who are looking to keep their business smaller for longer.
- Simple and easy to operate
- You have full power over business decisions
- Lower cost and fewer requirements
- Can offset business losses against income
- Can pay fewer taxes and fees
- Unlimited liability – all personal assets at risk
- Can’t split business profits or losses with family members
- Personally liable to pay taxes correctly on all income
What is a Limited Company Structure?
A limited company structure differs from a sole trader in several ways. One of the main appeals of a limited company structure is that business debts are ‘limited’. This means that if your company accrues a large financial cost due to legal trouble, damages or any other type of debt, it will remain the liability of the company and not the individuals who operate it.
It’s worth noting however that even those operating within a limited company structure can still be at risk. If a director of a company doesn’t comply with their legal obligations for example, then their personal assets could still be at risk for payment of company debt. In addition, if a director breaches their duties they may face regulatory action or be ordered to pay compensation.
A limited company is a more complex business structure and requires higher set-up and administration costs, as well as tighter regulations around its reporting and legal requirements.
While public liability does not extend to persons within limited companies, those operating under this business structure can still benefit from protecting their businesses assets with appropriate liability insurance.
Operating as a Limited Company
The main benefits of choosing to create or transition your business into a limited company structure is that it’s more accommodating for a larger sized business, with relevant benefits being more accessible and limitations such as regulation becoming more negligible.
- Exists as a separate legal entity
- Personal liability is limited
- Potential tax advantages
- Can bring in investor shareholders
- Higher set up and running costs
- More rules and regulations
- Must maintain strict record keeping
- Must lodge company tax return
Which is Best?
The type of business structure that’s right for you will depend on your own needs. The differences between operating as a sole trader or as a company mean that each type has advantages over the other depending on the circumstances.
The sole trader structure benefits smaller businesses which can’t afford to deal with excessive regulation and would otherwise suffer under such weight. Whereas the limited company structure offers advantages for business growth, such as the addition of shareholders and the limitation of personal liability.
The important question to ask is which structure will best suit the future of your business. Sole traders will always have the option of changing their business structure into a limited company model, although the process will naturally be more difficult than beginning as a company.
Some of the downsides of operating as a sole trader can also be offset by establishing a ‘partnership’. A partnership means that the business can have more than one owner, but both owners will be fully liable for each other. Tradesmen will frequently incorporate their wives as partners, as it can be beneficial from a tax perspective.
No matter which type of structure you end up choosing, it’s important that your risks in doing business are completely covered. Both sole traders and limited companies must ensure they have the correct insurance cover so that their business and personal assets remain untouched and their liability and reputation is protected.
This article was written by Daniel Defendi, who writes for Trades Insurance in Perth. You can catch him on Google+ to discuss this piece.
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