What you need to know if you plan to run your business as a sole trader
Business Structures – Sole Trader
This is our first article on the subject of business structures, with a focus on sole traders. In subsequent posts we are going to discuss other forms of legal business structures, including: partnerships, companies, trusts, franchises and joint ventures.
If you are planning to sell (or are already selling) goods or services on a regular basis, then this article is for you. Here we offer small business owners and entrepreneurs some basic considerations on doing business as a sole trader. Remember that this isn’t advice and it's always a good idea to consult a lawyer before making decisions that are this fundamental to your business.
A sole trader is an individual who conducts his or her business under their own name or a registered business name.
Anyone can start doing business as a sole trader as long as they have legal capacity to enter into a contract and have an Australian Business Number (ABN).
To become a sole trader, you need to at least:
Apply for an ABN
Check if your business will need a licence
Register a business name (optional)
Consider purchasing insurance to limit your liability
Tell the world about your business
In practice, it’s better to register a business name to protect the goodwill of the business. This becomes relevant if and when you come to sell your business. Business name registrations are managed by ASIC.
You don't need to register a business name if you plan to trade under your own name. So, if you wish to trade as "Paula Smith", you don't need to register. If instead you intend to trade as "Paula Smith & Sons", or any other name, then you need to register with ASIC as it's a legal obligation under the Business Name Registration Act 2011 (Cth).
A registered business name does not belong to the person who registered it. Also, registration does not protect any intellectual property in the ways that registered trademarks can.
Some business activities can only be conducted if you obtain a business licence. Check with the Australian Business Licence and Information Service to see if your business will need or needs one.
In sole trader businesses, the business and the individual running it are considered to be one person in the eyes of the law. So, the sole trader is personally responsible for all business debts and all claims that others may make against the business. While it is easier to control the levels of debt being assumed by the business, claims arising out of negligence are rarely expected and can mean millions of dollars.
Some liability can be mitigated by purchasing insurance products, such as: workers compensation insurance, public liability insurance, professional indemnity insurance and income protection insurance. These insurance policies can be very costly and not available to everyone.
In a sole trader business, your ability to raise capital for the business may be limited by your personal financial circumstances such as your own credit rating and what assets you own that can be used to secure loans.
- Very easy and inexpensive to set up and run
- Owner has total control and is entitled to all profits of the business
- Statutory regulation is minimal in comparison to other business structures
- Easy to sell or close down the business
- Owner can claim 50% discount on capital gains tax (CGT) for individuals
- Sole traders do not have to make employee expenditures such as payroll tax, various insurance policies and superannuation if there are no employees
- Owner can offset tax losses against other income
- No tax up to the personal tax free threshold of $18,200 (see the ATO website)
- Proprietor can hire family members to work in the business and split the taxable income
- Owner's liability is unlimited. A major downside that forces many small business operators to instead register a limited liability company
- Business is dependent on the health and talents of the proprietor. The business can cease to exist if the proprietor dies or falls ill
- Generally difficult to obtain finance and lenders require personal guarantees or security over property before they lend to the business. Lack of capital can hamper the growth and expansion of the business
- Limited options when it comes to splitting income between family members (apart from paying a wage)
- Limited options for planning and structuring your estate
- Must start collecting GST for the government if your turnover exceeds $75,000 per year (see the ATO website)
Becoming a sole trader is the easiest and cheapest way of running a business in Australia from an administrative point of view – but should not be entered into lightly! It would suit someone who: has grown their hobby into a business, wants to test their business idea in the real world and/or is not likely to hurt anyone (in any way possible) through the operation of their business.
However, as outlined above, this business structure opens the proprietor to unlimited liability and is limited in its utility for the purposes of: estate and tax planning, income splitting, raising capital and cashing in on your success if you wish to sell.
We recommend that you seek legal, tax and accounting advice before eagerly filling out your application for an ABN.
To ask us about this article or begin to discuss the most suitable business structure for you, simply contact Source Legal Online at email@example.com or 1300 609 450.