Starting your own company is a big business decision. One of the first steps you need to take is decide how to structure your business. Although there are a few different options to choose from, operating as a sole trader can be the most uncomplicated way to structure your company.
A key point to keep in mind is what your long-term goals for the company are, as well as what works best for your individual situation.
What Does It Mean to Be a Sole Trader?
A sole trader is one who exclusively owns their business. Establishing your company as a sole trader is the simplest structure form. Sole traders are responsible for the debts, income taxes, insurance coverage, liability, and structure of the company. They also receive all of the profits of the business. General laws apply to sole traders.
What Steps Do You Need to Take to Get Set up as a Sole Trader?
Structuring your business as a sole trader in Australia only requires a few steps:
- Register your business by applying for an ABN (Australian Business Number). An ABN is a unique number that identifies each business – no matter how large or small the company may be. You can apply online here: https://register.business.gov.au/.
- Use your TFN (Tax File Number) to trade.
- If you anticipate your annual income to be over $75,000, you will need to register for GST (Goods and Services Tax).
- Decide whether you are going to use your own name or use a trading name for your company. In order to make sure the company name will be exclusively yours to use for your brand, register the name as a trademark with IP Australia here: https://www.ipaustralia.gov.au/trade-marks
- In addition, should you decide to use a trading name, you will want to register it with ASIC (Australian Securities and Investments Commission).
What Do I Need to Know About Taxes?
Becoming a sole trader does come with some consequences regarding your taxes. Profits earned through your business are personal income, so they must be reported and paid via your personal TFN. You would pay the same tax as you would as an individual. Also, if you are an Australian resident, you are entitled to the same tax free threshold as an other individual.
It’s important to note that you are still responsible for your superannuation arrangements. This also applies to the contributions to any eligible employees in your company, as well. You may be able to claim a deduction on your personal superannuation on your taxes.
Additional information: https://www.ato.gov.au/Business/Super-for-employers/
Advantages of Becoming a Sole Trader
Structuring your business as a sole trader is the easiest and least expensive way to establish your company. In addition, the benefits of this type of business structure can include:
- Fewer legal and tax issues.
- YOU are the decision-maker and have total control and management of the business.
- There’s no interference with partners or upper management to gain approval from in order to get things done.
- Reporting requirements are minimal.
- All after tax profits, minus expenses, are solely yours.
- If you ever decide to sell the business, all of the profits, after taxes, will be yours alone.
- As a sole trading business owner, if you sell the business, you are eligible for the 50% capital gains tax discount on the money you’ve earned on the capital asset sale that is held for at least 12 months.
- Any tax losses may be offset against any other earned income, subject to applicable non-commercial loss rules.
Disadvantages of Becoming a Sole Trader
There are some disadvantages in becoming a sole trader, as well. Some of the areas to consider include:
- Your personal assets are at risk if there is a liability or debt.
- You are personally responsible for all financial and legal areas of the business.
- As sole owner, there are no other parties to share any potential losses or debts.
- The capacity of growth can be limited, as you are not able to take on any partners or founders.
- All financing will need to be sought after by financial institutions – since you are sole owner, you cannot take on any investors, as you cannot offer any shares of your business as a result.
- The more income generated by your business so too does your tax liability – you do not have the option of flat tax rates like the larger corporations do.
- Tax planning will not be flexible, as your business income and personal income will be treated the same.
- Changing ownership of the company, if selling, is more difficult because valuable assets, such as goodwill, are inseparable from you as an individual.
- Operating as a sole trader, you are the only one in charge and bear all the responsibility – you may miss having an opportunity to share ideas or challenges with others, as done in other types of businesses with others.
In addition to operating as a Sole Trader, there are other options available to structure a business. The two most common are Partnerships and Companies.
In a Partnership structure, all the business partners jointly share the company, its assets, liabilities, insurance…as well as its debts. All facets of the business are shared among those involved in running the business.
In a Company structure, the business is created as a separate legal entity from you on a personal level (like the Sole Trader option) and is regulated by ASIC. This type of separation allows for flexibility in managing your business affairs, the distribution of profits, and protecting your assets. Operating as a Company also reduces your personal responsibility of business debts, as well as other liabilities.
In addition to the type of structure you choose to establish for your business, it’s critical to identify and maintain suitable business insurance for your company. Quotes for insurance can be obtained from a range of sources. You can contact the insurance companies directly, however this generally involves a lot of running around if you want to compare quotes from a variety of insurers.
A safe option for many business owners is to use an insurance comparison website for their sole trader business. Publicliability-australia.com.au has access to a network of insurance companies and can quickly provide you with many policy options to choose from to secure the most suitable insurance for your business.