A sole trader is the simplest and most commonly used business structure when starting a business. It is cost effective and easy to set up as there are few legal and tax requirements. Being a sole trader allows you to retain ultimate control of your business. This allows greater flexibility for growth of your business without pre-established restrictions. Registering as a sole trader when starting a business also allows the owner to reduce tax payable on employment income if a loss is made, subject to some conditions.
How to Register as a Sole Trader:
As a sole trader, you can use your individual tax file number (TFN) to lodge your tax return. It is important to note that the profits of the business are treated as personal income and you must report the business income you earn (after expenses) and pay income tax using your personal TFN. Alternatively if you carry out an enterprise you can apply for an ABN and use this number for all your business dealings. If your enterprise earns over $75,000 or more per year you will need to register for GST.
- If you are starting out or merely wanting to work for yourself, becoming a Sole Trader is a valid option.
- You are your own boss and your profit is kept by you;
- The set-up costs are inexpensive allowing you the best chances to launch your business. It is also simple and easy to establish your business for operations;
- Your business dealings remain private;
- If you are an Australian resident the first $18,200 profit is tax free;
- If necessary the business can easily be wound up; and
- If your business is successful and rapidly grows you can easily change the legal structure of your business.
- Operating as a sole trader is the cheapest business structure to set up, however some of these initial advantages can be outweighed if your business rapidly expands;
- Legal liability and protection of personal assets is a major of disadvantage of being a sole trader. For example, your personal assets may be attacked for large debts to suppliers or any shortfalls the business owes;
- As your business starts to flourish this could mean that the business is taxed as individual at a higher rate than companies of 42 per cent when the combined income exceeds $52,000, or at 47 per cent if it exceeds $62,500;
- A sole trader is responsible for setting up their own Superannuation arrangements. However, you may be able to claim a tax deduction for personal contributions; and
- WorkCover does not protect sole traders. Accident Insurance may be needed for your business.
What are the alternatives?
As your business grow you may want to consider:
A Partnership combines the resources and expertise of a number of people, the profits and losses are shared amongst the partners and any profits do not need to be disclosed to the public.
A Company is a separate legal entity, its shareholders are not liable for its debts. A company can trade anywhere in Australia and has a lower tax rate than the highest tax bracket for individuals.
When your business is starting out operating as a sole trader can be a great business structure it is simple to set up, flexible and low cost. However as you business grows incorporating will limit liability and decrease taxes, eliminating many disadvantages.
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