When you start a business, the first thing you need to think about is which structure you'll operate under.
If you’re the owner and operator of your business, trading either under your own name or a business name, then a sole trader structure might be the most suitable option. It provides you with the ease and flexibility to manage your business exactly the way you want to.
But it comes with its challenges, too. In this article, we discuss the right situation for operating as a sole trader, the benefits and disadvantages of doing so, and the tax requirements for operating your business in this manner.
As a sole trader, you don’t have to go it alone. Liston Newton Advisory is here to help you start off on the right foot, and provide you with the guidance and support to create a successful business.
The pros and cons of operating as a sole trader
[table]
[thead]
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[th]Pros[/th]
[th]Cons[/th]
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[tbody]
[tr]
[td]Quick, easy, and cheap to set up[/td]
[td]Full and unlimited liability is placed on the owner[/td]
[/tr][tr]
[td]Cost-effective, with minimal ongoing management expenses[/td]
[td]Adheres to rigid personal tax rates, with no opportunity to receive company tax rates[/td]
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[td]Easy to manage with one sole owner[/td]
[td]Does not allow for bringing on partners or investors[/td]
[/tr]
[tr]
[td]Flexibility for future growth[/td]
[td] When hiring staff, the owner is required to pay superannuation and Pay As You Go (PAYG) contributions[/td]
[/tr][tr]
[td]Straightforward tax obligations, with improved flexibility in tax deductions[/td]
[td]No government grants or tax offsets[/td]
[/tr][tr]
[td]Easy to shut down if need be[/td]
[td][/td]
[/tr]
[/tbody]
[/table]
A quick guide to business structures
When starting a new business, it’s important to choose a business structure that enables you to reach your unique goals. The most common business structures are:
- Sole trader: Perfect for individuals who are just starting their own business.
- Partnership: Suitable for two individuals looking to start a business together.
- Company: The most common structure for businesses with multiple employees looking to achieve high growth.
- Family Trust: Suits business owners who want to protect their family assets and distribute their income to the family in a tax-effective manner.
- Unit Trust: Started by multiple business owners who aren’t family members, who want to start a trust together.
When to set up business as a sole trader
Choosing a sole trader structure for your business is ideal if you’re starting out in a new venture. It’s prefect if you’re:
- Looking at running a freelance business.
- You’re a contractor.
- You’re testing a new business idea.
- You’re operating a small business out of your home.
It keeps things simple, with minimal upfront investment, and you can start working on your business almost right away.
Benefits of the sole trader business structure
Save money early on
Operating as a sole trader incurs minimal business set-up costs. All you need is your tax file number and an Australian Business Number (ABN), and you can effectively operate your own personal business. Your ABN is free to register under your own name. But if you’re going to operate under a specific business name you’ll need to register with Australian Securities and Investment Commission (ASIC), which is either $36 for 1 year or $84 for 3 years.
And that’s it — you’re now a sole trader.
Flexibility
You also have more flexibility on how you control your finances. You don’t need to pay yourself a salary, or declare dividends. And, unless you’ve got employees, you keep all your profits for yourself.
Easy to manage
A sole trader has complete control over their assets and business decisions. You’re not required to maintain ongoing financial reporting obligations, nor do you share the decision-making — it’s all up to you.
As your business grows, a sole trader can change their structure to a company or trust, and if things aren’t panning out, it’s easier to wind things up. Simply cease trading, and continue to file your personal tax returns as normal.
Straightforward tax obligations
Managing your tax is relatively straightforward, too. All you need to do is lodge your tax returns under your own tax file number.
Operating as a sole trader provides more scope and flexibility for what you’re able to claim as a tax deduction, and you’ll be able to claim most direct business expenses as tax deductions. Unlike other business structures, like a company structure, you don’t need to worry about rigid annual financial reporting.
Disadvantages of the sole trader business structure
It’s a solo affair
The joy of managing your business on your own can be contrasted by the inability to bring other owners or investors on board. Your business is run under your name — so it doesn’t translate well for fast-growing or scalable businesses.
If your business grows and you do hire staff, you’re also personally responsible for PAYG withholding obligations and guaranteed superannuation contributions.
Increased liability
As a sole trader, you have unlimited liability. This means that if anything in your business goes wrong, or you come into financial difficulty or face legal action, your personal assets will be at risk.
If you’re injured on the job, you can't receive workers compensation, either. And if you can't work, you won't earn money. In comparison, operating your business as a company means your business entity shoulders your liability for you.
Rigid taxation rate
A sole trader falls under the individual income tax rate. This means you can end up paying way more in tax.
Conversely, operating as a company gives you an opportunity to receive a reduced 27.5 per cent tax rate if your aggregated income falls under $25 million.
Additionally, you won't have access to tax planning opportunities. If you operated under a trust or a business structure, you could split business profits or losses with family members.
Tax requirements for sole traders
Operating as a sole trader means you follow individual income tax rates, and you lodge your return under your personal tax file number. You’ll also need to complete a business schedule in your tax return. It’s relatively straightforward, but it does make things more complex than your standard tax return.
All businesses want to grow, and as a sole trader you’re required to register for GST if you have sales of more than $75,000 a year, and you’ll need to lodge a quarterly Business Activity Statement with the tax office.
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Using a sole trader structure
Operating as a sole trader provides the flexibility to run your business your way. But it also means you take on all your business liability yourself.
Before moving forward as a sole trader, you'll need to answer the following questions:
- What type of business will I be running?
- Am I willing to manage and run my business by myself?
- Do I consider myself a contractor or freelancer?
- How do I plan on growing my business in the future?
- Am I likely to make more than $75,000 a year?
- Am I comfortable with a rigid tax structure?
- Am I comfortable taking on full liability for myself, assets, and any future employees?
Your checklist for setting up business as a sole trader
There are a number of things to consider, and questions to ask yourself, when setting up your business as a sole trader.
- Will you trade under your own name, or a business name?
- If trading under a trading name you need to register this with ASIC. It must be unique, so check its availability first.
- Apply for an ABN.
- If you expect to earn more than $75,000, you’ll need to register for GST
- What address will your business be registered to?
- Where will you work?
- If you plan to work from home, there may be some common personal insurance policies that provide extra reassurance.
- Do you need to register trademarks?
- Will you perform your accounting and tax yourself, or will you engage the services of an accountant?
- Will you pay yourself a regular superannuation percentage? This can be tax deductible.
