What is a form of business ownership in which the owners are liable only up to the amount of their individual investments?

If you’re thinking of changing from a sole trader to a company, it’s important you know what your reporting, legal and tax obligations are. To help you decide which business structure is right for you, we’ve compared the costs, liability requirements and reporting obligations for both sole traders and companies.

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Tax Considerations
Ownership interests
Ease and cost of set up
Flexibility
Raising Capital
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If you’re starting out and aren’t sure which business structure best suits your needs, read our business structures information.

	Sole trader	Company
Set up costs	Sole trader business structures have fewer set-up costs. Your costs may include:	Companies are more complex business structures, and have higher set-up costs. These costs may include:
Record keeping	A sole trader is a simple business structure so it generally has less paperwork. Business income and expenses go in your individual tax return using a separate Business and professional items schedule – you don’t need to lodge a separate tax return for your business. You need to keep your financial records, including tax returns, for 5 years. You need to make sure you notify government agencies of any business changes within 28 days.	A company generally has more paperwork and potentially higher ongoing costs. Companies must: Your financial records must: record and explain transactions and financial position and performance enable true and fair financial statements to be prepared and audited. Companies are subject to annual review by the Australian Securities and Investments Commission (ASIC) Companies are subject to annual review by the Australian Securities and Investments Commission (ASIC) You will also need to keep records that show your compliance with your other obligations and legal requirements of companies. These requirements include having: a registered officer a principal place of business regular company meetings a written record of meetings and resolutions. You need to make sure you notify government agencies of any business changes within 28 days.
Business income	The Australian Taxation Office (ATO) treats the money you earn in your sole trader business as your individual income. This means you are also responsible for any tax your business must pay. You can claim deductions for costs incurred in running your business. You can withdraw money from your business bank account.	Money the company earns belongs to the company. Even if you own the company (you are a shareholder), the money belongs to the company. A separate business bank account is mandatory for a company. As a director, the company may pay you wages or directors’ fees, but you cannot draw money from the company as personal drawings. If you receive funds from your company, then you must show the funds on your individual tax return.
Business debt liability	You are personally liable for financial or tax debts in a sole trader business structure. There is no division between business assets or personal assets (including your share of joint assets such as houses or cars). Assets in your name can be used to pay business debts.	The company is generally liable for all business debts. However, your personal assets can also be at risk if you’re a director of a company and the company can’t pay its debts. As a director, you are personally liable for pay as you go (PAYG) withholding and superannuation debts. Even when you cease as a director, you are liable for the period you were a director. A company can own property or assets, and these belong to the company – not the directors nor the shareholders. The company may sell these assets to help pay its debts.
Insurance	Your business activities will determine the type of insurance you need, for example the business type, whether you sell products or services and if you employ people. You should consider insurance for personal injuries, disability and death, as sole traders aren’t covered by workers’ compensation insurance. You require workers’ compensation insurance if you employ staff.	As with sole traders, your business activities will determine the type of insurance you need. Directors and officers liability insurance is not compulsory but may be considered by directors. You require workers’ compensation insurance if you employ staff. Generally, directors will not be held liable for the debt of a WorkCover claim. The company is liable.
Accessing money from your bank	As a sole trader you can take money out of your business account as personal drawings. A separate business bank account isn’t compulsory for sole traders, but it is recommended to keep track of your business finances.	A separate business bank account is mandatory for a company. As a director, the company may pay you a salary, wages or director's fees, but you cannot simply withdraw money as ‘personal drawings’ from the company. You may also receive money via shares, dividends or loans
Control of business	In a sole trader structure, you will have full control over your business. This also means that you are personally liable and responsible for all aspects of running the business.	In a company structure, if you are the only director, you will have full control over your business, but certain decisions must still be recorded as resolutions of the company. If there is more than one director, you will not have full control. All directors govern the internal management of the company and in line with certain rules, such as the company’s constitution or the replaceable rules. The most important obligations for directors include the duty to: act in good faith act in the best interests of the company exercise care and diligence prevent the company trading while insolvent report to and help the liquidator on the affairs of the company if the company is closing
Ongoing costs	You’ll need to update your business name annually. The cost of a business name registration is $39 for 1 year or $92 for 3 years.	Different fees may apply to your company at different points in time, depending on your business operations. Your company has an annual review date, usually the same date it was registered. Shortly after this date, ASIC will issue an annual statement and an invoice. You need to pay the annual review fee to keep your entity registered.
Closing your business	You need to cancel your ABN and cancel your business name within 28 days of ceasing trading.	Closing a company is more complex than just ceasing trading. A company needs to be formally deregistered so that it ceases to exist as a legal entity.
Employing people	Both sole trader and company business structures can employ staff. In either instance, you will need to: provide workers’ compensation insurance understand your tax and superannuation obligations understand your employees’ entitlements. Specifically in a company business structure, directors have a legal responsibility to ensure the company meets its pay as you go (PAYG) withholding and superannuation guarantee charge obligations.

Tax Considerations

The sole proprietorship any income to the business is treated as income to the business owner and all income is reported on individual tax return, and is taxed in the year it is received. Business deductions are permitted. While in partnership, a Partnership Agreement can allocate the profits or losses in any ratio agreed to between the partners but if there is no Agreement, the profits must be allocated equally. Business deductions are taken by the partnership before the income is distributed to the partners and claimed on their personal tax returns. The profit of a company is taxed to the company when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

Liability

In Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk. In Partnership, partners are liable for all the debts of the business and the full amount of these debts can be collected from one or more of the partners rather than the debt being equally shared. Partners can also be held liable for acts committed by one of their partners in the normal course of business. Owners of a Company have the liability protection of a corporation. That is because, the company exists as a separate entity much like a corporation. A company member cannot be held personally liable for debts unless they have signed a personal guarantee.

Ownership interests

Ownership interests in a company may be sold to third parties without disturbing the continued operation of the business. A sole proprietorship or partnership, on the other hand, cannot be sold whole

Duration

The sole proprietorship remains in existence for as long as the owner is willing or able to stay in business. When the owner dies, the sole proprietorship no longer exists. The assets and liabilities of the business become part of the owner’s estate. A sole proprietor can freely transfer a business by selling all or a portion of the assets of the business. In partnership the business organization ends with death, incapacity, withdrawal or bankruptcy of any partner, unless otherwise agreed to in a Partnership Agreement. In company form a continuity of life, it has the power to exist forever and, therefore, is unaffected by the death of an owner or manager or by the transfer of ownership interests.

Ease and cost of set up

The sole proprietorship and partnership it is easy to set up and may register a trade name to promote its products and services. While in company, a company must be registered with the Registrar of Companies. Company cost more to set up and run than a sole proprietorship or partnership. For example, there are the initial formation fees, filing fees and annual state fees. However, these costs are partially offset by lower insurance costs.

Flexibility

Beside that, a partnership may be relatively more flexible in the decision making process than in a corporation. But, it may be less so than in a sole proprietorship. That is because sole proprietorship management is able to respond quickly to business needs in the form of day to day management decisions as governed by various laws and good sense.

Raising Capital

A corporation has many avenues to raise capital. It can sell shares of stock and create new types of stock, such as preferred stock, with different voting or profit characteristics. Partnership difficult to rising additional capital but easier than sole proprietorship, that is because, sole proprietorship are the only owner, therefore can’t sell any shares to fund business growth, and banks are more skeptical about lending money to sole proprietorships.

There are several advantages to being a sole proprietorship. First, the sole proprietorship entity is a quick, inexpensive and easy form of business to establish, and can be inexpensive to wind down. In this type of business, there are no specific business taxes paid by the company. The owner pays taxes on income from the business as part of personal income tax payments. A sole proprietor has complete control and decision-making power over the business, and is therefore free to choose the direction of the business and it strategies and policies. Sale or transfer can take place at the discretion of the sole proprietor. Sole proprietorship can control all the asset and money of business and can take money out of company for personal use at any time, as long as make sure the business bills are paid. Sole proprietorship is relative freedom from government control. The further advantage is that the owner claims all the profits of the business.

There are several disadvantages to being a sole proprietorship. Sole proprietorship’s business is not a separate legal entity. Therefore, if the business is involved in any form of legal dispute, the individual owner has unlimited liability, which means the sole proprietor of the business can be held personally liable for the debts and obligations of the business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company. The sole proprietorship relatively limited viewpoint and experience that is because sole proprietorship is limited by the skill, time and investment of the individual owner. Sole proprietorship are unstable business life, the enterprise may be crippled or terminated upon illness or death of the owner.

There are several advantages to being a partnership. First, the partnerships are relatively easy to set up however time should be invested in developing the partnership agreement. Partnership files informational tax return. Partnership income is reportable and taxed on partners’ personal income tax returns. The main advantage of a partnership over a sole proprietorship is that the partnership combines the skills, talents, and knowledge of two or more people, and all partners have equal rights in the management of the partnership business

The main disadvantages of partnership are partnership is characterized by unlimited liability. Therefore, the partners are fully responsible for all business debts and obligations, irrespective of their involvement in the entity. The partnership form has a limited life therefore it may end with death, incapacity, withdrawal or bankruptcy of any partner. A great number of partnerships find themselves involved in disputes because of disagreements concerning profit sharing or decision making for the business. Partnership is limited financial therefore it may only borrow money or use partners’ savings. Must be dissolved and reformed to admit additional partners wishing to invest. A further disadvantage is known as mutual agency. Mutual agency is every partner acts as an agent for the partnership and for every other partner. Therefore, a partner can represent the other partners and bind them to a contract if he or she is acting within the apparent scope of the business. Partnership is relative difficulty in obtaining large sums of capital. This is particularly true of long term financing when compared to a corporation. However, by using individual partners’ assets, opportunities are probably greater than in a proprietorship.

The main advantages of forming a company is the limited liability protection provided to its owners. Because a corporation is considered a separate legal entity, the shareholders have limited liability for the corporation’s debts. The personal assets of shareholders are not at risk for satisfying corporate debts or liabilities. Companies are attractive investment. The built-in stock structure of a corporation makes it attractive to investors. The company form has a continuity of life, it has the power to exist forever and, therefore, is unaffected by the death of an owner or manager or by the transfer of ownership interests. Other advantages of company is taxation, owners of a company only pay taxes on company profits paid to them in the form of salaries, bonuses, and dividends. The company pays taxes, at the company rate, on any profits. Companies also have the ability to raise large amounts of capital through public share offerings. Companies have a set management structure. The owners of a company are shareholders, who elect a Board of Directors, which then elects the officers. Other than the election of directors, shareholders do not participate in the operations of the company.

There are several disadvantages to the company form of business structure. First, the company is more expensive and time-consuming to establish. Companies are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations. Company set up cost are expansive that is because company have to pay many fees to set up the business there are the initial formation fees, filing fees and annual state fees. Beside that, paperwork is a huge component of the company formalities that must followed. For example, business bank accounts and records must be maintained and kept separate from personal accounts and assets. . In company may result in higher overall taxes. C corporations have potential double-tax consequences — once when the company makes its profit, and a second time when dividends are paid to shareholders. S corporations can mitigate this tax issue. Company is disclosure of names of corporate officers and directors. Most states do not require that names of shareholders be a matter of public record; however, many states require that the names and addresses of corporate officers and directors be listed on one or more documents filed with the Secretary of State. The proper corporate formalities of organizing and running a corporation must be followed, to receive the benefits of being a corporation.

I preferred form a sole proprietorship. Sole proprietorship business has many advantages suitable to form in Malaysia. First, a sole proprietorship is the most basic of all forms of business ownerships. Many small businesses are sole proprietorships. Next, a sole proprietorship is easy to establish compare to partnership and company. Sole proprietorship doesn’t have to do anything special or file papers to set one up. Sole proprietorship typically requires few if any legal documents and minimal record keeping. Beside that, sole proprietorship may register a trade name to promote its products and services.

The sole proprietorship is not a taxable entity. Income from the organization is simply added to the owner’s personal income to determine taxable income. Sole proprietorship only one person involved in the business therefore it is easy to dissolve if and when the person decides to stop operating as a business.

A sole proprietorship is the least expensive type of business structure to establish. There is no need for a lawyer or for an excessive amount of money to be set aside in order to pay a number of fees. Corporations are much more expensive to start up. Therefore, sole proprietorship can be started fairly easily with minimal capital requirements.

A sole proprietorship, on the other hand, does not require any set payroll system or any other financial business structure. Many sole proprietorships simply set up a separate account at their banking institution for their business funds and record all applicable business expenses in the management of that account.

Since the sole proprietor is not a legal entity, the owner is entitled to all profits generated from the business and can exercise his entrepreneurial skills to the full. The sole proprietor is the boss, the owner, and the company all in one. Sole proprietorship provides an individual with the ultimate control that they may be looking for when they go into business for themselves. There are generally no partners to answer to and therefore sole proprietors can enjoy being their own boss and having 100 % decision making abilities and responsibilities including taking personal business risks that may end up paying off well, operating in whatever way owner want.

The most important reason that I preferred form sole proprietorship is sole proprietorship forms can expansion of the business with additional equity holder change of form from a sole proprietorship to a partnership or a conversion to a corporation or a Limited Liability Company. Although is difficult but it also have a success case. A classic example is the Kamdar Department Store, a multi-million ringgit business, which was a sole proprietorship business for a long time before it became a private limited company.