Sole trading

Sole trading

SOLE TRADING

A sole trader business structure is a person trading as the individual legally responsible for all aspects of the business. This includes any debts and losses, which can't be shared with others. This is the simplest, and relatively inexpensive business structure that you can choose when starting a business in Australia. As a sole trader, you'll generally make all the decisions about starting and running your business, although you can employ people to help you.

Media will be placed here

Key aspects of a sole trader structure

Is simple to set up and operate.

Gives you full control of your assets and business decisions.

Requires fewer reporting requirements and is generally a low-cost structure.

Allows you to use your individual Tax File Number (TFN) to lodge tax returns.

Has unlimited liability - all your personal assets are at risk if things go wrong. Your assets can be seized to recover a debt.

Any losses incurred by your business activities may be offset against other income earned (such as your investment income or wages), subject to certain conditions.

Doesn't require a separate business bank account, unlike a company structure. You can use your personal bank account but must keep financial records for at least 5 years.

As the business owner, you're not considered an 'employee' of the business. You should pay yourself, which is usually a distribution of your profit, but this is not considered 'wages' for tax purposes.

If you're a business owner without employees, there's no obligation to pay payroll tax, superannuation contributions or workers' compensation insurance on income you draw from the business. You can choose to make voluntary superannuation contributions to yourself though, to help you build up your superannuation.

You can employ people to help you run your business. There are compulsory obligations that you must comply with, such as workers' compensation insurance and superannuation contributions.

It's relatively easy to change your business structure if the business grows, or if you wish to wind things up and close your business.

You can't split business profits or losses made with family members and you're personally liable to pay tax on all the income derived.

Before deciding on your business structure, it is important to seek professional advice from a business adviser, solicitor or accountant to ensure the structure you choose meets your personal circumstances and business objectives. Find a low-cost business adviser near you in our Advisory Services search tool.

Advantages and Disadvantages of a Sole Trader

Sole traders

A sole proprietorship is a business owned one person, who has full control of the business and how it is run. They also own all the assets of the business and any profit that it makes. In the same vein, they are also responsible for all the debts and liabilities the business accrues. A sole trader is expected to register as self employed with HM Revenue & Customs and will be required to submit an annual self assessment, but generally speaking their accounting requirements are less onerous than those of a limited company.

Advantages of a sole trader

Sole traders benefit from the following advantages:

• Control – Sole traders maintain full control of their business. Running it how they please without the interference of others.
• Profit retention – Sole traders retain all the profits of their business.
• Private data – Information about sole traders is kept private, unlike that of limited companies which is necessarily made public after registration with Companies House.
• Specialist – Often a small business, sole traders can offer a more personal service with local roots and ties. This can be more appealing to potential customers in the local community.
• Personal – Because there is no need to confer with other decision makers, sole traders can make decisions quickly and act on them swiftly, providing for the needs of their customers.

Disadvantages of a sole trader

Just like any other form of business, being a sole trader can also have its disadvantages.

• Liability – sole traders are not seen as a separate entity by the law. Therefore, they are subject to unlimited liability. This means if the business gets into debt, the business owner is liable. In the worst case, this may mean a person risks their home, personal savings and any other assets they have both in and outside of the business.
• Finance – sole traders often find it difficult to raise finance to fund their business. They may struggle with expansion in the future.
• Reverse economies of scale – sole traders will be unable to take advantage of economies of scale in the same way as limited companies and larger corporations, who can afford to buy in bulk. This might mean that they have to charge higher prices for their products or services in order to cover the costs.
• Decision making – all decisions must be made by the sole trader. There is no room for help by others. So the success or failure of the business rests on one person.

As you can see, there are several advantages and disadvantages to starting up a business as a sole trader. Whether it is the best choice for you is a personal matter and varies depending on the type of business you are looking to start. Whatever you decide, here at The Company Warehouse we offer a number of services to help new businesses thrive. Why not take a look around our website today and see how we can help you get your business off the ground!

Characteristics of a Sole Trader

Liability

Lack of liability protection exists as one of the biggest disadvantages of operating as a sole trader. The government treats a sole trader and the business as the same legal identity. Sole traders have unlimited liability for events that occur while operating the business. If the company faces a lawsuit and does not have sufficient assets to cover a judgment, a sole trader may lose his home, automobile and other personal assets as a result. Creditors of a sole trader may pursue his personal assets as compensation for business debts and obligations.

Sole traders

Taxes

Sole traders do not have to file a business tax return on the company's profits and losses. Sole traders can pass their portion of company profits and losses directly to their personal income tax return. This is a contrast to a corporation that must file a corporate tax return. Sole traders must pay self-employment taxes on income earned from the business. Unlike corporations, sole traders are not able to deduct fringe benefits like the cost of providing death and life insurance benefits to employees.

Control

A sole trader has control over every aspect of the business. Sole traders do not have to consult with other individuals to make decisions for the business, which allows them to respond quickly to changes in the marketplace. This can also backfire if a sole trader lacks expertise in a required field like accounting or marketing. Sole traders can allocate company resources in any manner, as no law requires a sole trader to separate his personal income from business income. This means a sole trader may use company funds to meet personal obligations.

Considerations

A sole trader business lacks continuity. This means the company will end automatically if a sole trader dies, retires or decides to sell the business. This lack of continuity makes it difficult for a sole trader to attract investors. Sole traders may have to rely on their personal assets and business loans to secure financing to operate. A sole trader may have difficulty securing business loans for fear that the owner will die or become disabled.

10 Examples of Sole Proprietors

sole traders

A sole proprietorship is a business with a single owner and not registered as a corporation, partnership or limited liability company. A sole proprietor can work as an independent contractor or operate a small business. Sole proprietors own businesses in many industries. Many home-based businesses are operated by sole proprietors. Understanding common businesses operated by sole proprietors can help you decide if it is the right structure for you.

Bookkeeping

A bookkeeping business caters to the financial needs of other businesses. A bookkeeper posts a company’s revenue, expenses and other financial data to an accounting system. This gives businesses owners accurate financial information concerning their business. The financial information maintained by a bookkeeper is used to prepare a company’s tax returns.

Home Healthcare

The healthcare industry usually flourishes in both good and bad economic conditions. Many sole proprietors seek to benefit from this stability by starting home healthcare businesses. Many of these cater to senior citizens. Services may include cooking meals, cleaning homes and assisting with hygiene needs.

Financial Planners

Sole proprietors work as financial planners, offering their services to individuals and small businesses. They help families plan for retirement, save for college expenses and invest in securities. Financial planners catering to businesses may help a company set up its employee retirement packages and other employee benefits.

Landscaper

A landscaper may work alone or hire a small team of employees. Landscapers maintain lawns, plants and trees of homeowners and businesses. Most landscaping companies working with commercial customers hire employees to work on projects.

Computer Repair Services

Computer repair companies are often operated as sole proprietorships. Some business owners operate commercial shops, while others work from home. Small computer repair businesses typically cater to individuals.

Catering Company

Catering companies offer their services for parties, weddings, church functions and business events. In most cases, a sole proprietor operating a catering company needs to hire employees.

Housecleaning Service

The startup costs for a housecleaning business are generally low. Business owners can offer a variety of additional services, such as laundry, window washing and carpet cleaning.

Freelance Writer

Some freelance writers operate as independent contractors, while others start small publishing companies. A freelance writer provides content to businesses owners or writes content to sell to consumers. Press releases, sales copy, website content and blog posts are commonly provided by freelance writers.

Tutoring

Tutoring businesses provide learning assistance to students in a variety of subjects. Tutors may work with students in person or through online video chats. Many tutors have teaching experience or extensive knowledge in the subject they are teaching.

Virtual Assistant

Virtual assistants help entrepreneurs with administrative functions through the Internet. The tasks completed by virtual assistants depend upon the needs of clients. Common tasks may include checking emails, creating excel spreadsheets and typing documents.

ST