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Updated: Nov 28, 2022

Is this the best type of business structure for you?

Look around at all the different businesses around you and see how many types of business structures you can identify.

Common business structures in the landscape of Australian business include Partnership, Company and Trust structures.

However, the foundation of Australian businesses is actually what is known as Sole Trader. Simply put, it´s working for yourself. It is usually the cheapest and simplest way to set up and run a business.

What many may not be aware is that 97% of the total number of businesses set up in Australia belong to small businesses and family enterprises.

This basically means small businesses are really the backbone of the economy of Australia. Small in size but heavy in influence.

What is a Sole Trader?

It is a business run by an individual - you. In the eyes of the law and of course the Australian Tax Office (ATO), you and your business are the same entity. You share the same Tax File Number and Australian Business Number (ABN). You completely own and control your business and receive the income and profits. It is fully your responsibility to keep all the business bills in order and keep accurate sales and spending records.

Being a sole trader also means that you are equally solely responsible for any losses or debts incurred in your business and are liable for income tax from what you earn. You can do what you like with the after-tax business profits.

Many have heard of other friends or family setting up their own business and wonder too about giving it a go themselves. Becoming a sole trader does not have to be an intimidating endeavour. There are plenty of opportunities for small businesses to increase efficiency, accuracy, profitability, freedom and flexibility and even enjoy cost savings by automating routine accounting tasks.

Let's take a classic pros and cons approach to what it means to become a sole trader.

Pros of Being a Sole Trader

1. Full control of the business

Sole traders love the control and freedom of owning their business. They are not accountable to a partner, a Board or shareholders etc. You decide how you want your business to be run and which direction to go.

2. Own all the profits

The money you get from your sole trader business is seen as your personal income. You can keep all your business profits after tax.

3. Easy to set up

All you need to do is register your business name, apply for an Australian Business Number (ABN), and register for Goods and Services Tax (GST)*.

*Registering for GST is compulsory only if your business earns more than $75,000. Note that registering before this threshold means you are paying tax that you do not have to pay.

4. Less admin - time and cost

It is a business structure that is easy and inexpensive to trade. This encourages more people to give it a go. Also, the cost of accounting fees is much less. Registering a business name is cheaper this way and you do not have to lodge a separate tax return for your business.

5. More privacy

A limited company is required to make publicly available information such as their activities, performance, directors, shareholders etc. As a sole trader, what you do is literally your own business.

6. Offer a personal service

Because decision-making is entirely in your hands, you can choose the customer profile you wish to cater to, the type of service or product you want to offer and the overall connection you build with your customers is a more intimate and personal one. Just think of a hypermart versus your local friendly grocery store. Your grocer knows you so well he can get your shopping list items ready even as he sees you walking down the street towards him.

7. Easier to change business structure later

If you are not fully sure how far you want to go, a sole trader structure allows you to start small and build it up if things work out well. You can easily expand to the status of a company later. It is a lot less risky than to start off big as a company and then have to reverse the process.

Cons of Being a Sole Trader

1. Unlimited liability for all debts of the business

Being independent has its price. Because you and your business are one single entity, you are the one responsible for any losses or debts. This means that in the case of losses you cannot repay, you may have to put your house, personal property and belongings on the table for creditors.

2. More difficult to obtain finance

For banks, sole traders are seen as having a greater loan risk. Yes, your personal assets are considered to be business assets but banks are still not incredibly keen and some have even tightened conditions in recent years. The good news is, that there is an SME Loan Guarantee Scheme launched by the government in 2020 to help small businesses recover from the impacts of Covid-19. It allows banks to offer loans at very low-interest rates with the assurance they will be repaid. While this is not applicable for brand new businesses, new loan programs could emerge so it is worthwhile keeping a lookout for developments.

3. Responsible for all decisions

You are a one-man show as a sole trader. You are the CEO, the Board of Directors, the director, the manager, the admin, the accountant, the marketing specialist, the designer, the caterer, the cleaner...and you are fully responsible for every decision you make. It can feel heavy and daunting at times, and without a team or a partner to bounce off ideas, you lose the part of getting helpful feedback or a different point of view, not to mention just simply moral support and the energy and drive of working with others towards a common goal.

4. Have less time

As said earlier, you have to do everything, from start to end. You may find yourself working endlessly through the day and not feeling like you can disconnect. There is no clocking in and out, and your personal and professional timetable and life can merge to the point where you are working at odd hours, on weekends and during holidays.

5. Less flexibility in taxes

Because of progressive tax, the more income you make, the greater your tax liability. A company would be able to access flat company tax rates. A sole trader can´t. All your profits are treated as personal income, hence there is less flexibility in this area. Get some tips about Australian Small Business Tax here.

As always, knowledge is key, so speak to a professional to understand better the business structure that is most appropriate for your personal situation, and find one that can support your long-term business goals as well.

At CATS4TAX, it is helpful for us when clients ask questions to better understand their situation and what could lie ahead for them. We are here to show a clear path ahead and give our clients a boost in achieving their business goals.

If you want more clarity on the intimidating world of numbers and finances, why not download our eBook to help you gain some useful insights on Financial Accounting for Small Business.

Get in touch with CATS4TAX:

0404 483 685

Lyndall Ward, CATS4Tax Business and Tax Accountant


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