Why do you want to form a company when it is advantageous to start your business as a sole-trader?

In this current financial climate, with the inevitable redundancies and lack of employment opportunities, more people will be doing what they have wanted to do for some time and that is commence their own business.

Often as an accountant, one of the first things I hear from these people, is that they want to set up a company, through which to trade.

Each situation must be weighed up, however in lots of cases establishing a company is exactly what not to do, for reasons including the following:

• A registered trading name, at minimal cost, may be used to give you the desired name identity in the market place
• The success or otherwise of the business is unknown at commencement, so the structure time and cost is lost time and money, in the event of failure and those expenses not deductible against income of a revenue nature
• Expenses that are deductible to a company, are also deductible to a sole trader, with the exception that of course a sole trader cannot employ themselves
• Possible adverse effects with regard to capital gains tax
• A sole trader or partners in a partnership can take advantage of lower marginal rates of tax, up to a net taxable income of up to $80,000, whereas the corporate rate of tax is fixed at 30%
• Income losses may be offset against other income by an individual (subject to some considerations) whereas in a company they are carried forward to be used in a future period
• The proprietor is not an employee so fringe benefits tax provisions cannot apply
• Asset protection is not an issue or is of very low risk
• The cost of set-up and maintaining a corporate structure does not outweigh the benefits
• When the business develops, it is easy to convert to another structure, such as a trust or company at that time, with minimal or no adverse tax consequences, if that is desired due to other considerations such as introducing other partners.

As in all situations related to your financial matters it makes sense to seek professional advice before you take action.