What's the difference between a sole trader and a company?

In Plain English

A sole trader and a company are different ways of structuring a business. A sole trader is simply an individual running a business in their own name or a registered business name. The business isn't separate from the individual, so the individual is personally liable for all business debts.

A company, on the other hand, is a separate legal entity from its owners (shareholders) and managers (directors). This means the company can own property, enter into contracts, and be sued in its own right (Corporations Act 2001). Shareholders generally aren't personally liable for the company's debts, with their liability usually limited to the amount unpaid on their shares. However, directors can become liable for the company's debts in certain situations, such as when the company is unable to pay its debts or if they provide personal guarantees.

Detailed Explanation

The key differences between a sole trader and a company, based on the provided legislative context, are:

  1. Legal Structure and Liability:

    • Sole Trader: Not explicitly mentioned in the provided context, but understood as an individual operating a business. The individual and the business are not separate legal entities.
    • Company: A company has a "separate legal existence" from its owners, managers, employees, and agents (Corporations Act 2001). It possesses its own property, rights, and obligations. Shareholders generally have limited liability, meaning they are not personally liable for the company's debts beyond the amount unpaid on their shares (Corporations Act 2001).

  2. Powers and Obligations:

    • Company: A company has the powers of an individual, including the ability to own and dispose of property, enter into contracts, and sue and be sued (Corporations Act 2001).
    • Sole Trader: As the business and individual are one, the individual has these powers directly.

  3. Director's Liability:

    • Company: Directors may be liable for the company's debts if the company cannot pay them when due (Corporations Act 2001). They may also be liable for breaches of their duties to the company or if they provide personal guarantees for the company's debts (Corporations Act 2001).

  4. Continuity:

    • Company: A company's existence continues even if shareholders or directors change or die (Corporations Act 2001).
    • Sole Trader: The business typically ceases to exist if the sole trader dies or ceases to operate the business.

  5. Internal Management:

    • Company: The Corporations Act 2001 contains rules for the internal management of companies, such as those related to appointments and meetings. These rules can be mandatory or replaceable, with special rules for single-director/single-shareholder companies. A company can also have its own constitution to modify or add to the replaceable rules.