A sole trader is probably the simplest and lowest cost of the business structures. As a sole trader you are responsible for all aspects of the business – including any profit the business may make, but also for any debt or losses. If your business becomes insolvent, then you can be personally liable to cover the cost. Ultimately, this type of structure provides no real distinction between the business assets and your personal assets – for instance, your car or house may be used to pay off the debts of your business.
This business structure is inexpensive and quick to set up. A sole trader can use their personal tax file number (TFN) to lodge business tax returns and can use their own bank account to make business transactions – however, we recommend always keeping your business transactions separate from your personal bank accounts. This makes operating as a sole trader an effective way to get a business off the ground. While sole traders do make all the decisions about running the startup, they can employ people to help.
Sole traders have full control of their business’s finances. As a sole trader, you pay yourself a distribution of profits. If your business does not have employees, there is no obligation to pay payroll tax, superannuation contributions or workers compensation insurance, which helps to keep the costs of the business low. Sole traders are also not required to make deposits to their superannuation. However, we strongly recommend sole traders do make regular contributions (almost as if they are an employee of their business) to help them save for retirement.
Compared to other business structures, such as a company, sole traders are easy to change to other business structures. For example, to change to a partnership (two or more people), you would typically just have to cancel or transfer your current ABN or business name and apply for a new ABN in the name of the partnership. We would always recommend that you have a signed partnership agreement.
To help you better understand whether your business is best run as a sole trader, below is a table of advantages and disadvantages:
- Simple to set up and run
- Low startup cost
- Can have full control of the finances and decisions of the business
- Easy to change the structure of the business
- If the business has no employees, there is no payroll tax or workers compensation on income
- Can be held personally liable for any business debt/losses
- A sole trader is very limited in tax deductions for their own super contributions
- When the business is operating as a profit, the income of the business is added to personal (employment) income. This may lead to a higher tax rate.
Our team at Bolter has extensive knowledge about business structures and can help you decide what the right business structure is for you, and can even help you set up your business for you.