As a sole trader, you simply run a business as an individual. No complex structures or fancy accounting work: you simply register an ABN in your own name, and away you go. You can trade under your own name (e.g. Sami Sara Legal), or if you register a business name, under any name that is available (e.g. Lawcrest).
If you operate as a sole trader, all income derived from the business is attributed to you personally, as if it was income that you earned from a regular job. That means you will pay tax on that income at the same rate as if you had earned that money as an employee. However, unlike an employee, no one is deducting tax at regular intervals and remitting it to the ATO, which means that:
- you will have more funds in your own hands throughout the year; and
- when you lodge a tax return, the tax office will be expecting a cheque from you for the tax that you owe.
If you earn (or expect to earn) over $75,000 in any given year, you will also need to register for, and start collecting, GST and lodging quarterly statements (BAS statements) with the ATO in relation to that GST.
Positives of operating as a sole trader
The key positives of starting your business as a sole trader are:
- there are virtually no setup costs
- it’s quick and easy to get started. You can apply for an ABN yourself, and start operating virtually the same day.
A business run by an individual may be simple, but it involves risks. These risks include:
- All business risks are attributable to you personally, so if there is a liability or debt owed by the business, you will be pursued personally for that liability.
- If your business takes off, you will be taxed at your personal tax rate. That means a tax rate of 45% on income over $180,000
- If you take on a third party investors or team up with a partner, that will require a restructure. This may cause an unavoidable capital gains tax liability.
Freelancers are usually sole traders, as much of the work they do would be ‘personal services income’ anyway, meaning that they can’t avoid paying tax at their personal rate regardless of how they’re structured (I’ll post an article on this shortly). Certain professionals, such as doctors, also operate as sole traders for similar reasons, and because the risks inherent in their line of work are attributable to them personally anyway (e.g. medical negligence claims cannot be avoided by trading as a company).
Not suitable for…
Practically any other business. Whilst it’s common to see small businesses operated by sole traders (e.g. cafe’s), it is never advisable to do so because you can’t isolate yourself from the business risks in the same way that you can if you operate under a company or trust structure.
Do you want to know more?
Contact us to find out more about operating as a sole trader and to learn about your business structuring options.