Weighing up the best business structures for self-employed individuals
By Karan Anand
Head of Australia, Hnry
The rate of sole traders and independent contractors entering the market has increased significantly over the last few years. Currently there are 1.5 million sole traders working in Australia, which equates to roughly 12% of the Australian workforce. The benefits of being a sole trader are as apparent as ever - more work flexibility, access to more jobs, and being your own boss - and those benefits massively outweigh any perceived drawbacks.
One of the things we talk about a lot at Hnry is what business structure is best for self-employed individuals. In this article we’ll talk through the three most common business structures available to contractors and freelancers, which include:
PTY Ltd Companies; and
ABN Sole Trader
Some recruitment agencies may decide to take charge of payroll for their contractors themselves, preferring contractors to be on a PAYG basis. In these cases, they can either bring on internal staff to manage payroll, or outsource to a contractor payroll company. Contractor payroll services effectively allow them to manage contractors to ensure they get paid on time and all their tax obligations are taken care of - letting the employer and the contractor focus on their jobs knowing that their payroll is being completely taken care of.
Although this may seem like a simple option, it’s often the most expensive option for both contractor and recruitment agency. On top of that, this structure can cause internal admin hassle for the recruitment agency in those instances they have to follow up with an external company to sort out a problem or deal with a 3rd party being involved in internal timesheeting or on-boarding processes.
Hiring a service to take over payroll for contractors can also be quite risky. With Contractor Payroll Companies, there’s often a lack of clarity over who is employed by whom. This can lead to confusion over who is professionally liable in the event a professional, payroll or tax mistake has been made, causing undue risk and stress for both the recruiter and the individual.
PTY Ltd Companies
Many of those new to self-employment will instinctively opt to take on a company structure rather than remaining as a sole trader. This is often unnecessary and can create additional complexity and headache in the future.
By way of benefits, being the director of a limited liability company offers some protection of the individual’s personal assets in the event that they’re taking on large amounts of debt as a company, and the ASIC guidance is clear that should an individual be taking on debt, creditors or is considering selling all or part of the business in future, that a PTY Limited company structure is the way to go.
The ATO and ASIC however, do not recommend registering a Pty Limited Company if there is no need to, as it can lead to additional administrative burden and unnecessary costs. If you are working as an individual, with no full time salary staff, no creditors, and you are not incurring large debts, then ASIC recommend operating as an ABN Sole Trader rather than a PTY Ltd company.
With a company structure, there’s also the extra administrative burden of lodging the tax returns for the company - on top of the individual’s tax return!
Finally, as a PTY Ltd company you are also required to take out Workers’ Compensation insurance to provide accident and work-injury coverage to your employees - rather than the simple income or accident protection insurance policy that you would need to get as an ABN sole trader.
ABN Sole Trader
Setting yourself up as an ABN sole trader is the most straightforward and inexpensive set-up for a self-employed individual. Being an ABN sole trader still offers a lot of the same benefits as registering a company, such as:
operating under a business/trading name,
being able to register for GST,
claiming back on expenses, and
the ability to register a .com.au web address.
In some circumstances, contractors may even be entitled to superannuation contributions from their clients or employers, when operating as a Sole Trader.
If you’re an ABN Sole Trader working as an individual with no employees or subcontractors, you are not required to take out a Workers Compensation insurance policy - as you are deemed to be your own ‘worker’. However, it is still your responsibility to ensure you have adequate equivalent insurances in place - particularly to cover you if you suffer an injury or illness at work - and so many sole traders take out Personal Accident or Income Protection insurance. These are equivalent to Workers’ Compensation insurance, and also have the added benefit of covering non-work-related incidents as well.
When it comes to tax time, being an ABN Sole Trader is the easiest structure for lodging tax returns. The profits you earn from your business are treated as a personal income, which means you only need to lodge a single tax return, rather than lodging one for yourself and one for your company.
For recruitment agencies, it is always clear where the responsibility lies when dealing with ABN Sole Traders, and the liability and risk regarding outputs and professional standards always remains with the individual.
For independent contractors, there are pros and cons to each of the three common business structures. At Hnry, we almost always recommend contractors keep it simple and register as an ABN sole trader, especially if they’re not going to be employing staff or taking on large loans to start up their business.
Here at Hnry, we strive to make it even easier for sole traders - providing an all-in-one accounting service designed specifically for individual sole traders, taking away all the stressful tax and financial admin that comes with being self-employed. Hnry also partners with recruitment agencies to help them reduce risk and place contractors into roles faster!
For more information, feel free to reach out to Hnry’s team of accountants via phone call or live chat.
Karan is Hnry's Head of Australia and manages Hnry's brand, customer relationships, partnerships and team in the Australian market. Karan came from a management consulting background, having spent 10 years at Deloitte prior to joining Hnry. He is motivated by the desire to make the transition to self-employment easier for Australians by removing the burden of financial administration.