Overview of a Sole Trader
A sole trader business structure is where – because the business and the owner are one and the same. – he or she has all of the control and is entitled to all of the profits. Even if trading under a business name, the business is not a separate legal entity to the individual owner.
If a business name is used, it must be registered with the ASIC. Trading under an unregistered business name is an offence.
Many successful enterprises begin their way in business as a sole trader and transition later – when likely profitability seems assured – into the type of more sophisticated entity they decide is more suitable.
As a sole trader you are legally responsible for all aspects of your business including any debts and losses and day-to-day business decisions. – Business.gov.au
Key benefits of a sole trader
Consider the following key aspects when you are planning to start your company as a sole trader:
- It’s easy to set up and operate
- Offers you complete control across your capital and actions on business;
- Involves less regulatory requirements as well as being a minimal-cost structure in particular;
- Enables you to file tax returns with your individual tax file number (TFN);
- Does not require a separate business bank account, though this is recommended to make your business income and expenses easier to track;
- Requires you to keep at least 5 years of financial records.
Key liabilities and downfalls of a sole trader
- If things go wrong, you have unlimited liability and all your personal assets are at risk;
- Does not allow you to share gains or losses with members of your family;
- Responsible for paying tax on all income generated.
Other factors to consider
Business name
If you use your own name, you don’t need to sign a business name. You will need to register a business name with the Australian Securities and Investment Commission if you choose not to use your own name.
When filing to register a business name, you will need to receive an Australian Business Number (ABN). Applying with the Australian Business Registry online for an ABN is free.
Tax requirements
As individuals, sole traders are taxed and pay personal income tax (GST). If your annual turnover is expected to exceed $75,000, you will need to register your business for goods and services tax (GST).
Visit the ATO website for more information on tax obligations for sole traders.
Insurance
A sole trader is responsible for the company’s liabilities. Liability is unlimited and includes all personal assets, including any assets jointly-owned with another person, such as a house.
Also, if you injure yourself at work, you are not covered by workers ‘ compensation. This can result in a loss of income if you are unable to work and you may still have to pay any expenses for your business, such as repayment of loans.
Learn more about your company’s various insurance options.
Choosing the right business structure – Is Sole trader the right option?
Choose the one that best suits your business needs when you settle on a framework for your company. Research that choice carefully, as for each system there are key factors and rules to research. The structure of your business will determine:
- The licences that you need;
- How much tax you will pay;
- Whether you are an employee or a business owner;
- Your personal responsibility;
- How much control you have over your business?;
- Ongoing overheads and paper work for your business
Seek advice from a professional business consultant, business structure lawyer or accountant before deciding which business structure to use.