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Sole Trader: Do the Advantages Outweigh the Disadvantages?
Launching a business often means operating as a sole trader — but what are your options? Fullstack examines the pros and cons.
If you’ve decided to launch your own business, the first step is deciding on how you want to structure it. For many businesses, the simplest solution is to begin operating as a sole trader. There are a range of advantages and disadvantages to running a business in this way in Australia that should be considered before you get started.
This article outlines the pros and cons of being a sole trader and provides a breakdown of the most common alternatives.
Why Operate as a Sole Trader?
It is straightforward to a business as a sole trader. You are the business. Sole trader business are extremely inexpensive and can be established with minimal legal formalities. Sole trader businesses also benefit from fewer tax formalities.
People that operate as sole traders manage their businesses themselves, owning and controlling the entire business and trading by themselves. Their businesses benefit from the greatest freedom in business operation as there is no potential for disagreement with business partners.
As well people operating in this way keep all after-tax profits generated by their business as well as any after-tax gains generated should the business be sold.
How to Set Up as a Sole Trader
Setting up a sole trader business is an extremely simple process. You just have to establish your business under an Australian business number (ABN). Traders that set up a sole trading business with a TFN trade in their own name. If you expect to turn over more than $75,000 within a single year it’s best to register your sole trader business for GST as well.
It’s important to note that the profits generated by a sole trader business are treated as personal income. This means sole traders must report business income after expenses accurately and pay income tax through their personal TFN. Sole traders are subject to the same income tax rules as everybody else.
Sole traders are also entitled to the tax-free threshold on the condition that they are an Australian resident.
People operating a business in this way are responsible for arranging their own superannuation. If you employee people, you’re obligated to make superannuation contributions for eligible workers. If you’re arranging your own superannuation contributions you may be able to claim a tax deduction.
What are the Disadvantages of Being a Sole Trader?
- While operating as a sole trader can be an inexpensive method of establishing a business, there a number of factors that must be taken into consideration. These businesses are subject to a number of disadvantages, which include:
- Sole traders are legally responsible for the entirety of their business, all financial elements of the business. Your personal assets may be at risk in the case of liability or debt
- Sole traders are not able to raise capital by offering shares in their business. Your options are instead to raise capital via financing offered by lenders
- The process of selling a sole trader business is complicated
- The debts and losses incurred by a sole trader business cannot be shared with business partners
- Operating a business in partnership with others often delivers collaborative benefits that are unavailable to sole traders
What are the Alternatives to Being a Sole Trader?
- The alternatives to setting up a business as a sole trader are:
- Incorporating a company
- Setting up a partnership
Setting up a company in Australia is a complicated process. Companies are regulated by ASIC, and are separate legal entities from business owners. This provides business owners with additional financial protection and risk minimization benefits. For more information on setting up a company in Australia, see the Fullstack guide on How to Incorporate a Company in Australia
Setting up a partnership allows all partners to collectively share in the ownership of a business, as well as benefit from an equal share in all debts, profits, and losses.
If you’re not sure whether you should launch your business as a sole trader or consider setting up a company or a partnership, get in touch with Fullstack for detailed business structure guidance today.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.