If you’re operating as a sole trader in the IT industry, one of the key decisions you’ll face is whether to set yourself up as a contractor or through a company structure. Both options offer distinct benefits, depending on your goals and how you want to manage your finances. For many IT professionals, the choice comes down to balancing liability protection, tax efficiency, and administrative ease.
Here’s a breakdown of the advantages of both options, helping you determine which structure best suits your business needs.
Advantages of operating through a company structure
1. Limited liability
One of the biggest advantages of operating through a company is the limited liability it offers. As a shareholder, your personal assets—like your home, savings, and car—are protected from any business debts or legal issues the company may face. This protection is not available to sole traders, who are personally liable for their business’s debts.
Note that your company will require a director which will most likely be you. Directors can face liability in some situations if they are deemed to have breached their director’s duties contained in the Companies Act. Nevertheless, a company is a popular structure due to the improved protection that structure has vs a sole trader structure.
2. Tax flexibility
A company structure allows some more flexibility in some situations to manage income more efficiently by paying yourself a mix of salary and dividends. While companies have different tax rates than individuals, various rules including the “attribution rules” and some case law prevent most high earners from using a company solely to avoid the top tax bracket. However, tax planning can still be beneficial in some situations, especially when growing to be an IT consulting firm with several team members.
3. Professional credibility
Operating through a company can enhance your professional credibility. Many corporate clients, especially larger organisations, prefer to work with incorporated entities, as they are often seen as more stable and reliable. For IT professionals offering cybersecurity consulting, software development, or managed IT services, being a registered company may help secure long-term contracts that require a formal business structure.
4. GST and multi-income management
If you run multiple income streams, such as IT contracting and an Airbnb or short-term accommodation business, operating through a company can provide better financial separation. This can help keep your Airbnb earnings below the $60,000 GST threshold, avoiding unnecessary GST registration for your Airbnb while maintaining clear financial records for your IT income.
Advantages of operating as a contractor (sole trader)
1. Simplicity
A contractor (sole trader) structure is the simplest and most straightforward option. There’s minimal paperwork involved, and you won’t have to manage corporate compliance tasks like filing annual company returns or maintaining detailed financial records beyond tax filings.
2. Lower costs
Operating as a sole trader is often cheaper in the short term. You won’t have to pay company registration fees, annual filing costs, or accounting fees associated with a company structure. This can be a cost-effective choice for IT professionals just starting out, particularly those working on freelance development projects, IT support, or contract-based software engineering roles.
Conclusion
While contracting as a sole trader offers simplicity and lower upfront costs, the benefits of using a company structure—such as limited liability, tax flexibility, professional credibility, and financial separation—make it a compelling choice for many IT professionals. Although running a company involves more administrative effort, modern accounting tools like Xero and our streamlined service offering make managing finances, invoicing, and compliance straightforward. The additional administration costs are not significantly higher than a sole trader structure, and the protection and financial benefits of operating through a company often outweigh the extra effort.
The Accounting Hub specialises in the IT industry. Get in touch with us if you would like to discuss which structure best suits your situation.
