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Business Structures 101: Part 2 – Sole Traders

Business Structures 101: Part 2 – Sole Traders

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.

Business Structures 101: Part 1 – Introduction

Business Structures 101: Part 1 – Introduction

Starting a business is an exciting and challenging process. You dream of what will be and focus on your vision for the business. Despite the exhilaration entrepreneurs experience during this phase of business there are some less exciting and often overlooked considerations that need to be addressed long before we start registering names and building websites.

One such consideration is your business structure. It is easy enough to jump on the Australian Business Register and apply for a personal Australian Business Number (ABN) but that is not necessarily the best idea. In fact, that step may be setting you up to fail from day one and could cost you thousands of dollars to fix later on.

As a professional accountant working with small business owners I see this almost every day and have the less than enjoyable experience of letting my clients know that they have a massive tax bill I can’t do anything about and fixing their structure to stop it happening again in the future is going to trigger a capital gains tax bill as well.

So, rather than continue on this destructive path lets fix the problem. Make sure you understand the basics of business structuring and seek some professional assistance before you start your business. Your future self will be grateful you did!

 

Choosing Your Business Structure – What to consider

There are a number of business structuring options available to small businesses and one solution does not fit every business situation. Its important that you consider your personal situation as well as your long term goals for the business. The choice of structure depends on factors such as:

  1. The type of business you operate and in which industry;
  2. Your personal financial situation;
  3. Whether the business is just you or if others will own part of it;
  4. How large you intend to grow the business; and
  5. Whether you are building the business to operate or to sell.

As a professional advisor my focus is always on the structure that will give my clients the most flexibility in planning for cashflow and tax management as well as protecting their personal assets without being so expenses to operate that the cost outweighs the benefit. Sound complex? It can be, but the subject is too important not to cover off on all the variables.

 

Choosing Your Business Structure – Your Options

Under normal circumstances small business owners have four general structuring options available to them under Australian law. A basic comparison of the four options is outlined below. While each structure will be covered in more detail later in this series of articles the table below is a handy way to compare their pros and cons in one place.

  Sole Trader Partnership Company Trust
Cost to set-up and maintain Low Medium High High
Complexity Simple Moderate Complex Complex
Reduce risk to owner No No Yes Yes (with the right Trustee)
Do I receive all the profit? Yes No No No
Can I employ staff? Yes Yes Yes Yes
Do I have to pay myself superannuation? No No Yes No
Ability for smart tax planning? No Limited Limited Yes
Is it easy to raise capital? No No Yes Yes
Is it easy to close down or exit? Yes Yes No No

 

Each of the four options brings with it advantages and disadvantages as well as giving the business owner different tax and reporting obligations that need to be managed effectively. Your accountant or business adviser can help you make the right decision here and if they’re not taking steps to ensure you are properly structured then you are working with the wrong accountant.

 

Where Do You Go from Here?

This article is the first in a series. Each Business Structure in the table above is covered in more detail later in the series. To learn more about a particular structure I would recommend reading the rest of the series as each article is published.

For some professional advice on Business Structuring Contact Us.

 

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.