Warning Sole Traders

Ltd Company versus Sole Trader

If you are a sole trader or thinking of starting a new business you have a few things you may want to consider. And mostly that is is the structure of a sole trader the right one for you
If you dream big, however, and foresee the growth of your business, then you may have to consider the advantages of establishing a limited proprietary company instead of being a sole trader.

A limited proprietary company is an incorporated entity. Its existence starts upon the issuance of the ACN by the Australian Securities and Investment Commission (or ASIC).

So you remove the liability of your company from your personal liabilities. Your company's creditors will not necessarily be your own creditors. This is particularly important when your business may one day hit a financial down cycle.

In the extreme case, a business may become insolvent, which occurs when the financial obligations of a business exceed assets.

As your business's obligations fall due, your creditor will first try to collect from the single proprietorship. If any of your creditors pursue and win a legal action for collection against your business, your creditor will most likely look for properties in your name to satisfy his or her claim against you.

The most obvious ones that your creditor will go after are bank accounts under your name, shares of stock in your name, motor vehicle/s and even the roof over your head.

As the owner, you assume the financial risks of your business personally and can be made liable for them.

To avoid losing your home or other personal asset, your most logical choice should be to set up a limited proprietary company.

With an incorporated company in place, you are now able to take financial risks for the company without fear of exposing your personal assets unnecessarily. Generally, a creditor who decides to run after your company for any unpaid obligation will have to satisfy his or her claim using the assets of your company, nothing more. Your car and your home are protected for as long as you do not execute a personal guarantee for your company's obligations.

Yes the affordability of starting as a sole trader may be attractive initially, the economic benefits of setting up a limited proprietary company over the long term may make the hassle of registration with the Australian Securities and Investment Commission (or ASIC) well worth it and plus the costs of setting up a Pty Ltd Company may surprise you in its affordabiltiy.

If you are unsure of the security of your current situation it would be worthwhile speaking with your accountant or solicitor.

If you wish to set up a Ltd Company you can find out more here.