Establishing a business as a sole trader is as simple as jumping onto the Australian Business Register website and apply for an Australian Business Number (ABN). There are virtually no additional overheads, unless you choose to register a business name through ASIC and the business income is reported as a separate schedule in your personal income tax return.
A sole trader is just the individual in business for themselves. They are ‘the business’ – they retain complete control everything and all the business profits are taxed in their hands. There is no separation between the individual’s personal assets (like the family home) and the business operation. Your liability is unlimited – meaning that personal assets can (and will!) be used to pay business debts.
After your first year of business profits the Australian Taxation Office will enter you into the pay as you go (PAYG) instalments system. The PAYG system requires regular payments of preliminary tax based on what they believe your business profit will be for the following year. Any excess tax paid as a result of this will be refunded on lodgement of your income tax return.
Pro’s and Con’s of using a Sole Trader Business Structure
Advantages of Trading as a Sole Trader
- Easy and inexpensive to establish and maintain;
- Complete control of the assets and business decisions is retained by the individual;
- Very few reporting requirements;
- Any losses incurred as a result of the business’ activities may be used to reduce the tax paid on other income earned (such as investment income or wages), subject to satisfying certain conditions;
- You cannot be an employee of your own business when structured as a sole trader. As a result there is no obligation to pay, superannuation contributions, workers’ compensation insurance or another other payroll related costs on income your draw from the business;
Disadvantages of Trading as a Sole Trader
- Unlimited liability which means all your personal assets are at risk if the business operation gets in trouble;
- Little opportunity for tax planning – you can’t split business profits made with family members and you are personally liable to pay tax on all the income earned;
- Business debts and losses cannot be shared;
- Limited access to additional capital for business growth;
A Word of Warning about Trading as a Sole Trader
At Panic Atax we strongly recommend business owners avoid operating as a sole trader – Even if you think your business is just ‘small’.
Even a business which is not generating sufficient income to require a great deal of tax planning can still expose the owner’s personal assets to significant risk. While the more robust business structures do add a little bit of complexity and some additional administration costs the benefits out way these costs. It’s always easier to get the structuring right from day one!
If you are currently operating a small business as a sole trader please refer to the articles later in this series which explore your alternative structuring options, or contact us for help.
Where To from Here?
This article is the second in a series on business structuring. Each common business structuring option will be covered in its own article as the series is published.
If you are interested in Business Structuring or you are concerned that your business may not be structured as well as it could be I would recommend reading further in this series or contact us for assistance.
Working with Panic Atax
Panic Atax is a Brisbane based Accounting and Business Advisory firm specialising in building strong relationships with clients and removing the stress and hassle many small business owners experience around financial reporting and tax. If you’re looking for an accountant to build a great, long term working relationship with we’d love to hear from you.