If you’re thinking of starting up the million-dollar business idea you’ve always dreamed of, you may want to prioritise structural business decisions before you get too carried away buying merch, an office pinball machine or a store ‘open’ sign.
Starting a business can be fun and exciting – however, the most important decision you’ll make early on is your business structure. The business structure you choose may have serious effects on how you run and grow your business now and down the track. So, consider choosing a structure that’s simple and matches your business goals, keeping in mind that you can always change your business structure later.
What’s a sole trader?
A sole trader is an individual carrying on a business. The business is owned directly by the individual and the individual is legally responsible for all aspects of the business. A sole trader will manage and operate a business under the individual’s name, meaning the individual takes on all responsibility for any debts, losses and profits made. This also means that sole traders can employ or contract others, but cannot employ themselves.
The sole trader structure is one of the simplest structures to set up, meaning it’s relatively inexpensive and easy, which is great for startups. It’s the first choice for small businesses and, in Australia, the sole trader structure is found commonly amongst contractors, tradespeople, entertainers, home businesses, online stores, e-commerce websites and most other small businesses.
Advantages and disadvantages of sole traders
For those considering the sole trader business structure, it may be worth to jot down some pros and cons to opting in. Below are the most common advantages and disadvantages of the sole trader structure.
Advantages of sole traders
It’s simple: For those choosing the sole trader structure, the simplicity of set up and ease of operation is one of the most attractive parts about it. If an individual is working on their own, or with only a few employees, the sole trader structure allows them to focus on more important aspects of their business due to the fewer reporting requirements for the ATO.
It’s profitable: Whether it’s five dollars or five thousand dollars, all profit will land in the pocket of the owner of the sole trader business. For individuals, this structure works best due to the ease of money going straight to them. Plus, the privacy of these profits isn’t an issue – as sole traders aren’t required to disclose profit amounts to the public, except to the Government.
You’re in control: If there’s a business decision to be made, the sole trader will make it. Individuals using this structure have full control of their assets and business decisions, making it the perfect structure for small businesses looking to make decisions quickly and attend to their customer’s needs.
You don’t have to pay super on your earnings: Prefer to invest your profits in other ways? Well, you can since sole traders are not required to pay super for themselves. If you have employees, however – you’re still legally required to pay their super.
Disadvantages of sole traders
The liability is yours: The age-old saying ‘what goes up, must come down’, doesn’t fall on deaf ears for the sole trader. Just as profits go in the pocket of the sole trader when business is good, assets and personal property come out when business is bad. These items of a sole trader may be vulnerable for debts and business liabilities in the unfortunate event the sole trader can’t pay back creditors. Debts stay with the individual even after the business is closed.
Little room for tax planning: As sole trader income belongs to the individual the moment it’s earned, it’s not possible to split the income amongst your family, or keep it aside. This income is combined with all other income (rental, dividends, salaries) and taxed at marginal rates.
If you don’t work, you’re not paid: For sole traders, (or owners of any company), not working means that the income for that day will cease. If you have only one employer, consider being classified as employed rather than contracting out via your Australian Business Number (ABN). With employment comes benefits including sick leave, annual leave, Fair Work conditions and other government protections. But remember, whilst a sole trader or contractor is perfectly within their right to book a holiday or take a sick day, they may want to consider that if they shut down, their business does too.
How do I set up as a sole trader?
We can have you set up as a sole trader in minutes if you’re our client.
So, if you’re sold on the sole trader, you’ll need:
- An individual tax file number (TFN) to lodge your income tax return.
- An Australian Business Number (ABN) to use across all business dealings.
- A Goods and Services Tax (GST) if your annual turnover is more than $75,000.
There are also a few rules to follow. You’ll need to:
- Report all your income in your individual tax return using the business income and expenses section.
- Pay tax at the same income tax rates as individual taxpayers.
- Put aside money to pay your annual income tax at the end of the financial year. These will be paid through quarterly Pay As You Go (PAYG) instalments.
Want to know more about sole traders?
At Business Tax & Money House, we take the time to understand which business structure is right for you. We look into your business succession, the distribution of your profits, your financial exposure, and your ongoing costs to decide how each structure will work at each stage of your business journey.
Whether you’re starting up a new structure, or restructuring your current business, engaging BTMH in this process is a step in the right direction to help maximise your growth. If you want to learn more about the sole trader structure, or any of the other business structures, contact us today.