When starting a business in Australia, many individuals choose to operate as a sole trader due to its simplicity and low cost. While this structure can offer several benefits, it also comes with certain risks and limitations.

What is a Sole Trader?

A sole trader is the simplest form of business structure. It involves one individual operating the business and assuming full control and responsibility for all aspects of the operation. There is no legal distinction between the business and the owner.

Example

Sarah is a migration agent based in Sydney. She decides to operate as a sole trader to keep things simple and cost effective. She sets up an ABN and begins offering her services to clients all over Australia. Sarah enjoys keeping all profits and making her own business decisions. However, as her client base grows, and she begins to hire employee. Later on, she starts to consider changing her business structure to a company in order to limit her personal liability and better manage her tax obligations.

Advantages of Operating as a Sole Trader

1. Easy and low-cost setup
   Registering as a sole trader is quick, simple and inexpensive. You only need to apply for an Australian Business Number (ABN) and register a business name if required.
2. Full control
   As the owner, you make all decisions and retain complete control over the direction and management of the business.
3. Retain all profits
   All business profits go directly to you as the owner. You are not required to share income with other business partners or shareholders.
4. Simple tax obligations
   Sole traders report business income as part of their individual tax return. You may be eligible for the small business tax offset and can claim business expenses accordingly.
5. Fewer compliance requirements
   Sole traders face fewer reporting and regulatory obligations compared to companies or trusts. This makes it easier to manage day-to-day administration.

Disadvantages of Operating as a Sole Trader

1. Unlimited personal liability
   You are personally responsible for all business debts and liabilities. If the business is sued or cannot pay its debts, your personal assets may be at risk.
2. No income splitting
   You cannot share business income with a spouse or family member for tax purposes, which may result in higher tax obligations compared to other structures such as a trust. However, it is important to note that, not all busineses operating under a trust can split income. Some professional businesses may fall under the PSI / PSB rules that may prevent the trust from splitting income or retain profit in a company.
3. Reliance on the individual
   If you fall ill or take leave, the business may stop operating. This structure often depends heavily on your personal effort and availability.
4. Limited growth potential
   While suitable for small businesses, a sole trader structure may not support large-scale growth or expansion. Transitioning to a company or trust may be required as the business grows. Raising finance can be more challenging as lenders may view sole traders as higher risk. Investors are also less likely to invest in this structure.

Operating as a sole trader is an excellent starting point for many small businesses. However, it is important to consider your long term goals and risk tolerance. As your business evolves, you may need to revisit your structure to ensure it continues to meet your needs.

If you need help deciding which structure is right for you, please contact us today for an obligation free consultation.