Once you have an idea in mind for your business, one of the first decisions you will make is to consider what business structure works for you. For many small business owners, they start their new venture by choosing the sole trader structure.
Sole traders are the backbone of the Australian business community, from hiring employees and apprentices to contributing tax. They exist in nearly all facets of industry, and despite the setbacks of the Covid-19 pandemic and the rising cost of living, their entrepreneurial drive is still striving to grow their business.
This blog will explore the sole trader advantages and sole trader disadvantages that many small business owners experience. Hopefully, it will help you consider whether you will join the 1.5 million Aussie small businesses that have registered as a sole trader across Australia.
Advantage: Being your own boss
This is one of the main benefits of working as a sole trader. If you ask a sole trader what’s the best thing about being in business for yourself, they will likely tell you it’s being your own boss. You can finally run things the way you want without the pressure of a manager looking over you and questioning your every decision. You can make the big calls and distribute funds and resources as you see fit. It can also give you greater control over your work/life balance. If you aren’t up for working today, then you don’t have to! No one is there to tell you otherwise.
Being your own boss also gives you the freedom to offer your personal touch when conducting business. You can stand apart from a soulless corporation by injecting who you are as a point of difference.
Disadvantage: Being your own boss
While being your own boss certainly has its advantages, too much of a good thing can hurt you in the long run. You cannot share responsibility between a business partner or co-founder under this business structure, and having all decisions made by you can be incredibly stressful. While you can employ workers to help you, ultimately you cannot delegate the final say to anyone else. From accounting and tax to social media and marketing, the buck will stop at you at the end of the day. Therefore, you will have to put on many hats and broaden your skills if your sole trader business is going to succeed.
Advantage: Setting up is relatively simple
Setting up a sole trader business in Australia is relatively simple compared to other business structures. To get started, all you need is an Australian Business Number (ABN) and get a business name through the Australian Business Register (ABR). Then you will need to contact the Australian Tax office (ATO) to ensure they are connected in the ATO’s systems. From there, you are basically good to operate.
Sole trader businesses are a lot easier to set up than a company for example. Companies require significantly more time and money to get started, such as registration fees, annual reviews and more stringent GST requirements. In comparison, sole traders have few reporting requirements as there a very few specific regulations other than keeping financial records for five years.
Recommending reading: Company vs Sole Trader: Difference
Disadvantage: No flexibility in your tax
One of the major differences between sole traders and other business structures how tax is sorted out. When you are a sole trader, the law treats the profits of your business as personal income. Therefore, you must report the business income earned and pay income tax from your individual tax file number.
This means that while you will be entitled to the tax-free threshold if you earn $18,200 or under, you will have to pay the same tax as any other individual after that. While there are some advantages to this structure, such as having the ability to offset losses against other income you earn and tax breaks, there are some disadvantages to look out for.
A key difference between a sole trader and a company is that sole trader structure has no flexibility when it comes to tax. Since all your business income will be treated as personal income, the more you make the more your tax increases. Unfortunately, this makes it impossible to access the flat tax rates that companies enjoy. This difference is often a key decision for small business owners when looking to start a new venture.
Another thing to consider is that if you are expecting an annual turnover of more than $75,000 you will have to register for GST through the ATO. This added tax could dampen your paycheck at the end of the day.
Advantage: You keep all the profits
One of the best things running a business as a sole trader is that you get to keep all the after-tax profits. You don’t have to split the profits with co-founders as you would under a partnership or owe anything to shareholders or the executive team under a company. While you still must pay your employees a fair wage and abide by superannuation and workers’ compensation requirements, the rest is yours to maximise your future profits or save it for a rainy day. This even applied to if you sell the business. And why wouldn’t it? As a sole trader you’ve borne the personal risk of assuming responsibility and you should get the reward of all your hard work.
Disadvantage: You’re liable to any debts
One of the biggest disadvantages when it comes to operating under a sole trader business structure is that you have unlimited liability. What this means is that under the law there is no distinction between your personal and business assets. This means that your personal assets are at risk if you encounter any liabilities along your business journey.
While this is a major disadvantage, there are some key types of sole trader insurance designed to protect you from the risks you face. One of the key types of business insurance cover many sole traders consider is Public Liability insurance*. Public Liability insurance* is designed to provide protection if a third party is injured or sustains property damage as a result of your negligent business activities.
The bottom line
Running a small business under a sole trader structure is often a daunting step for those looking to take the plunge. It basically means everything is on you financially and decision-wise when it comes to running your business. Having sole trader insurance and a sound business plan can set your sole trader business up for success in the long run even if the worst were to happen. After analysing the pros and cons and putting these protections and goals in place, you will hopefully be on your way to launching your business as a sole trader.
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