Choosing the right business structure Part 1- Sole Trader

When setting up a business, it’s important to consider the structure of the business right from the start, as it will allow you to manage your personal risk, protect your assets, limit your liability, give you a platform for future growth, and manage your tax obligations.

There are 4 common business structures in Australia, which include:

• Sole Trader
• Partnership
• Trust
• Company

This article will delve into the structure of sole trader, lifting the lid on the main benefits, disadvantages and tax implications of this popular model. If you’re wondering which is the right structure for your particular circumstances, talk to one of our registered tax agents.  

Sole Trader

A sole trader or ‘sole proprietor’ is the easiest and cheapest of all the business structures to set up. As a sole trader, there is no legal separation between the individual and the business. The individual is responsible for all debts incurred in the business, and all income is treated as personal income.

The sole trader may choose to set up business in their own name, or a business name. They must apply for an Australian business number (ABN) and use it in all business dealings.

If a creditor, supplier, bank or customer makes a claim against the business, and the business is not able to pay all these claims, they may choose to take legal action and recover the claims not just from the business assets, but also the personal assets of the sole trader.

Sole Trader Pros

• Easy to set up and maintain
• The sole trader has complete ownership, control and management over the direction of the business
• The trader owns all business profits and assets
• Less paperwork and minimal reporting and legal requirements governing how the business operates
• Greater privacy due to not having to disclose profits to the public
• Easy to wind up
• The trader owns all profits and assets
• Start-up costs to this type of business are usually quite low
• This business structure is relatively easy to change as your business grows or changes down the track

Sole Trader Cons

• This business structure means the owner has a personal liability for any debts incurred, and if business debts can’t be paid, they risk losing personal assets such as a vehicle or home.
• Sole traders pay tax on profits at their individual tax rate, which may be higher than the company rate
• Sole traders may have limited options when it comes to holidays, sick days or if they are unable to run the business due to illness or disability. If they can’t work, the business may stop operating
• There is limited capacity for growth as a sole trader. Sole traders can’t take on business partners or co-founders, and capital growth is limited as investors or shareholders can’t be brought on
• Sole traders bear the full brunt of all costs to the business, including to expand the business, so are usually slower to grow
• Sole traders can’t minimise tax by income splitting or streaming with family members

Key tax implications

• Sole traders use their individual tax file numbers (TFN) when lodging tax returns
• All income is reported in their individual tax returns using the ‘business’ section to show income and expenses.
• A sole trader must register for goods and services tax (GST) if their annual GST turnover is $75,000 or more, they provide taxi, limousine or ride-sourcing services regardless of turnover or they want to claim tax fuel credits
• A sole trader may voluntarily use, or be required to make PAYG instalments to prepay their tax
• Sole traders can claim a deduction for personal super contributions
• Sole traders can hire workers, but they must meet all employer and super obligations for them

The sole trader business structure is popular, but as we’ve outlined above, has its limitations. Tune in next time where we’ll explore another popular business structure in Australia, the partnership.