Sole Trader Business Structure

In the Establish Legal Risk and Management module of our Small Business Management Course we discuss business structures and the implications each of the four different structures can have on how you borrow money and even how much tax you pay.

Over the next week’s worth of posts we’ll look at the four most commonly used business structures — 1) sole trader, 2) business partnerships, 3) companies and 4) trusts — to help you decide what is right for you.

Sole Trader Structure

This is the easiest way of starting a business and often, depending on the type of business you operate, there are very little start-up costs involved.

As a sole trader, one person makes the business decisions: you. That doesn’t mean, however, that you can’t employ staff — a sole trader can, too, employ staff, but as the business owner you trade, control and manage all aspects of the business.

Advantages of being a sole trader

• This is the ideal business structure if the business, itself, is not complicated – i.e. freelance web designer.
• The structure is inexpensive to set up and there are very few legal and tax formalities.
• You may not have to register a business name.
• The report obligations are less stringent than other business structures.
• You’re entitled to profits and the ownership of assets.
• You have full control of the business and it’s relatively easy to wind-up.

Things To Consider

• Your access to finances are usually limited to your own resources.
• You’re personally liable for all debts — debts and losses cannot be shared.
• You’re legally responsible for all aspects of the business.
• Large sums of capital are less likely to be available to a sole trade — you may have to rely on overdrafts or personal savings.
• If you have no employees, you’ll have to do all of the work.
• You can lose personal assets such as your home, contents and vehicles if the business goes into debt.

Reporting and Paying Income Tax

• As a sole trader, you need to report the business income you earn (after expenses) on your personal income tax return, along with any other income you earn.
• You pay the same tax as an individual and you’re also entitled to the tax-free threshold (the first $18,000 you earn in an income year) if you’re an Australian resident.

Paying Superannuation

• You are responsible for your own superannuation arrangements, but you may be able to claim a deduction for personal super contributions you make. You might also make super contributions for any eligible workers you employ.

For businesses that require little-to-no start-up capital and will incur few overheads, the sole trader business structure is the quickest and easiest way to get your business off the ground.

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Please note that this information is only offered as a guide and, of course, you should consult an accountant, tax professional, solicitor or business advisor before deciding which business structure to use.

Our next post in the Business Structures Explained series is: Business Partnerships.