Sole Trader Business Guide

If you’re thinking of starting your own business in the coming months, you must gather all the necessary data you need to make informed decisions about ways to move forward.

One of the key topics to explore is business structure.  

The type you choose impacts your set-up costs, asset protection, tax liabilities, level of control over the business, and more.

Read on for the lowdown on setting up as a sole trader in Australia.

Definition of a sole trader

A sole trader business is the simplest, most cost-effective type. 

The definition of sole trading is that you run your venture as an individual. You are the only owner. 

You become legally responsible for and control every part of the business operation. 

You may employ workers for your business and must pay their superannuation. 

Plus, you’re responsible for your own super. 

Any of the debts and losses associated with your business fall on you and can’t be shared with other people or organisations.  

Some examples of people who may choose to become sole traders include hairdressers, business consultants, freelance writers, and tradespeople.

Other business structures to be aware of

Before you choose to become a sole trader, understand the other types of business structures you could choose.

partnership arrangement is easy and affordable to set up, too. 

It involves two or more people creating and running a business together. 

They distribute any income and losses between themselves. 

Partnerships can be general, limited, or incorporated. 

Research each type if you’re interested in this structure. In general, though, the differences relate to business management and the level of liability each partner is open to. 

Another option is a company.

More complex than a sole trader or partnership structure, a company is a separate legal entity of its own. 

Like an individual, a company can sue, be sued, and incur debt. 

However, if you create a company, your liability is also limited. You don’t become liable for the company’s debts. 

You do, though, retain a financial obligation to pay any unpaid share amount if required.

And, if you’re a company director, you may be held personally liable if found to be in breach of any relevant legal obligations. 

There is also a trust set up. 

Quite expensive to begin and operate, trusts impose an obligation on a person (the trustee) to hold assets or property for the benefit of others. These people are called beneficiaries.

When operating a business as a trust, the trustee is the one who’s legally responsible for all business operations. 

Like a company, trusts involve formal annual administrative work. Plus, a formal trust deed needs creating.  

Note that a trustee can be a company, too.

Setup requirements

It isn’t too time-consuming or difficult to set up your sole-trading business.

First, decide if you want to trade in your own personal name, or if you want to set up a separate business name.  

If the former, moving forward is simple.

Since you’re using your own name to trade, you need only apply for an Australian Business Number (ABN).  

This is a unique, 11-digit number. It’s used in numerous places to identify your business to the government and others. 

To apply for this number, go to the Australian Business Register (ABR) and fill out the online form.  

Have your tax file number (TFN) handy and other relevant information, and allow around half an hour to complete the process. 

Once you’ve received your ABN (which is free to apply for), you’ll use it for all your future business dealings. 

If you decide to create a specific business name, register this entity with the Australian Securities and Investment Commission (ASIC). 

This business name has no legal entity status.  

It doesn’t provide you with legal protection or ownership over that name, either – to get this, you have to trademark it. 

The business name you select should relate to your business operations and be as catchy and memorable as possible. 

Before you get your heart set on a name, though, check the National Names Index on the ASIC website. Choose something currently available. 

Ensure you can obtain a relevant domain name (website address) at the same time, too, since most ventures require an online presence these days.  

Plus, ensure the business name hasn’t been trademarked by someone else. 

There are some cases in which you can work around this, but it can mean your trading rights are limited, and the legal costs become high. 

Steer clear of these murky waters if possible for your sole trader business. 

Once you have an available business name chosen, apply for it through the Business Registration Service or via the ASIC website, if you already have an ABN.

Tax implications

When you create a sole trader structure, you get taxed as an individual and pay personal income tax rates.

You use your individual TFN when lodging your annual return; there’s no separate business tax return to complete. 

Sole traders must report all relevant trading data on their return, using the business items section. 

Break up transactions into income and expenses on your paperwork.  

The net profit or loss from this trading activity is added onto/subtracted from your other taxable income. 

Since you have an ABN for sole trader purposes, this means that, provided you quote this number on all your invoices, your clients aren’t required to withhold tax from your payments during the year.

Plus, while taxed as an individual, there is a small business tax offset you may be eligible for.

You may also be able to claim a deduction for any business assets purchased per financial year.  

You can claim a deduction for any personal super contributions you make, too. You must notify your superannuation fund that you plan to do this, though.

Remember that you can’t claim deductions for any money you “draw” from your business. 

For tax purposes, the money you take from your venture to live on or spend in other ways as a type of “wage” isn’t actually considered as such. 

Another essential tax factor relates to Goods and Services Tax (GST). 

If you expect your annual business turnover (your total combined invoice value for the financial year) to go over $75,000, register for GST. 

Doing this means you charge GST to clients by adding 10% onto your invoice amounts. 

You then hand over this percentage to the ATO each year. 

By the same token, you won’t have to pay GST when you incur business costs with GST included in the price.  

This percentage gets refunded back to you by the ATO. 

Once registered for GST, you’ll need to submit quarterly Business Activity Statements (BAS) to the ATO to summarise all the GST paid and collected over that quarter. 

It’s wise to put aside money to pay your income tax at the end of the financial year, so you don’t have a large outstanding balance once you complete your tax return.

You may also do this by paying quarterly Pay As You Go (PAYG) instalments to the ATO.

Advantages of sole trader businesses

A key benefit of sole trader setups is that they’re simple to set up and run. 

They’re cost-effective, too, since you don’t have too much paperwork.  

You’ll have minimal reporting obligations to deal with yourself or have your accountant or lawyer look over.

Plus, you retain total control of all business decisions and assets, and you can offset business losses against other income (subject to conditions).  

Another big positive of a sole trader arrangement is that it’s not too hard to change the business structure if your business grows and you wish to convert to a partnership, company, or trust.

Similarly, if you want to wind up your business, this is easy to do, too.

Disadvantages of sole trader businesses

The main con to be aware of when it comes to sole trading is that it leaves you vulnerable to risk.

With unlimited liability, your personal assets are at risk if you get sued or go bankrupt.  

Another downside is that you can’t do much tax planning when you run as a sole trader. 

There’s no ability to split business profits or losses with family members to reduce tax liabilities.  

You must pay all the tax on the income from the business yourself.

Frequently Asked Questions about Sole Trader Setups

Q: As a sole trader using my own name, can I promote my business using a brand name if I haven’t registered that name yet?

A: No. It’s an offence to trade or otherwise carry on business under an unregistered name, unless you operate only under your specific name, such as Harry Smith. You must register a business name with ASIC if you want to trade under a name that’s different from your legal name.  

Q: Can sole traders receive government stimulus, grants, tax write-offs, and other support?

A: Yes. Soletraders receive access to a variety of stimulus, grant, and write-off opportunities. However, do your research on each option to ensure you’re eligible and speak with your accountant for specific advice and assistance.  

Q: I’m not sure which business structure is right for me, because of the product or service I sell or my future plans, or other factors. What should I do next?

A: All entrepreneurs should speak with a licensed accountant and, potentially, a financial planner and other advisors to obtain information about which business structure will suit them best now and in the future.  

If you’ll be operating a business that’s open to higher risk, or if you have complex familial financial and legal elements at play, you may need to consider a partnership, company, or trust structure instead. 

You may still be able to go ahead with a sole trader structure but put comprehensive contracts in place to protect your interests better when dealing with clients, suppliers, employees, etc. Insurance, such as public liability and professional indemnity, may also be a good idea for you, depending on your circumstances.

What next?

Before you select a business structure and set up your venture, get professional advice tailored specifically to your needs and situation. 

Also, learn more about planning out and managing new business operations.  

Investigate sales and marketing techniques, cashflow tips, employment rules, and helpful accounting software tools.

Download your free, customisable business plan template

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