How to become a successful sole trader

A ‘sole trader’ is exactly what it sounds like — one person owning and running a business.

The Australian Taxation Office (ATO) defines it as an individual running a business using the simplest and cheapest business structure. Business.gov.au and other state agencies echo this, emphasising that sole traders are legally responsible for all aspects of their business, including debts, losses, and day-to-day operations.

No matter how you define the term, being a sole trader comes with both freedom and responsibility.  You call all the shots and keep all the profits, but you’re also personally responsible if things go wrong. Despite the risks, it’s a common starting point for many small business owners, thanks to its low cost and simple setup.

What is a sole trader?

A sole trader is the simplest business structure available in Australia, where one person owns, manages, and operates the entire business. There’s no separation between the individual and the business, meaning the owner receives all profits but is also personally liable for any debts or losses.

The sole trader structure suits people who want full control and flexibility, from setting prices to managing clients and daily operations. It’s a practical option for anyone wanting to test their business idea or work independently without complex administration.

Sole traders vs. companies: Which structure is right for you?

When starting a business, one of the most important decisions is whether to register as a sole trader or set up a company. A sole trader structure is easier to manage. You’re the boss, you make the decisions, and you keep the profits. The trade-off is that you’re personally liable for any business debts or legal issues.

On the other hand, a company is its own legal entity. It offers limited liability protection, which means the company is responsible for its debts and liabilities, rather than you personally. But that protection comes with more rules, ongoing costs, and administrative responsibilities.

For many small business owners, the sole trader path is a great starting point because it’s affordable and flexible. As your business grows, you can always transition to a company structure later to better protect your assets and expand your opportunities.

How to register as a sole trader

The good thing is that there isn’t oceans of red tape to fight through to set up your sole trader business. In fact, there’s really only a couple of steps that you need to take to register as a sole trader, as outlined below.

1. Choose your business name: Pick a name for yourself – it may even be your given name – then register it with ASIC. Use the Australian Trade Mark Search to make sure the name of your fledgling business doesn’t infringe on any existing trademarks.
2. Register for an ABN: It costs nothing.
3. Register for GST: If your annual turnover is $75,000 or more (or $150,000 for non-profits), you’ll need to register for GST through the Australian Taxation Office (ATO).
4. Set up your Tax File Number: If you haven’t already done so.
5. Manage your finances: Keeping track of your finances early helps your business stay organised and compliant. Set up a system to record income and expenses, track GST, and plan ahead for tax obligations.
6. Registrations and licenses: Apply for any registrations or licenses that may be required by industry governing bodies, regulators, or local councils.
7. Get required licences and permits: Check if your business type needs any licencing or local council approvals. For example, construction, hospitality, and health-related businesses may require formal licences or permits to operate legally.
8. Assess your finances: Even business owners operating as sole traders with much less ominous overheads need to carefully tend to their finances and ensure there are funds available to sustain the business from day one.
9. Set up your business insurance: Yes, sole traders, like all other business owners, require business insurance. Make sure you allocate time and funds for setting up insurance for your new sole trader business with a business insurance broker who makes it quick and easy for you.
10. Set up a business bank account: Keeping your personal and business finances separate makes record-keeping easier and helps you stay organised when managing taxes or claiming business deductions.
11. Set up a website: Once your business is ready to go, build a website to showcase your services and help potential customers reach you online. It’s a great way to build trust and grow your visibility from day one.

Pros and cons of becoming a sole trader

Like any business structure, operating as a sole trader comes with advantages and disadvantages. Understanding both can help you decide if this setup fits your goals.

Pros of being a sole trader

Simple setup and low costs

Starting as a sole trader is quick and inexpensive. You only need an ABN and a registered business name.

Full control and flexibility

You make all the decisions and keep full control of your business operations. This allows you to adapt quickly, experiment, and grow at your own pace.

Easier tax reporting

As a sole trader, your business income is treated as your personal income, which means tax reporting is generally simpler than running a company.

Cons of being a sole trader

Personal financial risk

You’re personally liable for any debts or losses your business incurs, which can put your assets on the line.

Limited funding options

Sole traders can find it harder to raise capital, as banks and investors often prefer lending to companies.

Heavy workload

You’re responsible for every part of the business, from admin to sales. This can easily get overwhelming without support.

Common risks for sole traders

Running your own business may give you more freedom, but it also means taking on more risk. Here are some of the most common risks sole traders face.

Personal liability

As a sole trader, you and your business are legally one and the same. That means you’re personally responsible for any debts or legal claims made against the business. If something goes wrong, your personal assets, such as your home or car, could be at risk.

Injury or illness

When you work for yourself, there’s no paid sick leave or Workers’ Compensation safety net. If you fall ill or get injured, you could lose income while recovering. Having Personal Accident & Illness insurance might be a good idea as it could help cover your income during this time.

Property damage or theft

Your tools, equipment, or stock are often the backbone of your business. Losing them to theft, fire, or accidental damage could stop operations entirely.

Cyber and data risks

Even small businesses can be targets of cyber-attacks. Losing sensitive client data or access to your systems can be costly and damaging to your reputation. Having Cyber Liability insurance could help you recover faster and minimise financial damage.

Check the sole trader insurance requirements in NSW and Victoria

Lastly, it’s important to note that sole trader insurance requirements and other important business requirements for sole traders can vary a lot from state to state.

So make sure you check the relevant sources in your state to ensure that you’ve met all the administration requirements, sole trader insurance requirements, and other essentials necessary to operate as a sole trader in your home state.

To learn how to get set up as a sole trader in Victoria, refer to the sole trader information on the become a sole trader page on the Business Victoria website.

If you’re in NSW, refer to the set up as a sole trader page on the Service NSW website.

To learn more about starting your own sole trader business, check out our must-read comprehensive guide to setting up a sole trader contracting business.

While you’re busy building your sole trading business, let us help by handling your business insurance*. The way we work simplifies and demystifies the process of purchasing insurance for sole traders and small business owners just like yourself. Because business insurance shouldn’t be hard, nor time-consuming. Go online for your business insurance or give us a call 1300 920 864 to see how we can help protect your sole trading business.

Frequently asked questions

How is a sole trader different from a company?

The key difference is that a sole trader and their business are legally the same. You make all the decisions and keep all the profits, but you’re also personally liable for any debts. A company operates as a separate legal entity. This gives its directors limited liability protection, meaning their personal assets are generally protected if the business runs into trouble.

Do I need an ABN to operate as a sole trader in Australia?

Yes, you’ll need an Australian Business Number (ABN) to operate as a sole trader. It’s free to register and allows you to invoice clients, claim tax credits, and register for GST if your annual turnover exceeds $75,000.

How do I pay myself as a sole trader?

As a sole trader, you don’t pay yourself a wage like an employee. Instead, you simply draw money from your business profits as personal income. You’ll pay tax on those profits at individual income tax rates when you lodge your tax return.

Can a foreigner be a sole trader in Australia?

Yes, non-residents can register as sole traders in Australia if they hold the appropriate visa that allows them to work or run a business. They will require an Australian Business Number (ABN) and a Tax File Number (TFN), and they’ll also need to follow the same tax and business registration requirements as residents.