What are the pros and cons of being a Sole Trader?
Operating a business as a sole trader has its pros and cons, and there are a lot of factors that determine whether this structure is appropriate for your business. A sole trader is defined as a self-employed individual who runs a business. It is the easiest and cheapest business structure to operate in Australia and many business owners decide to become sole traders because of this.
The are alternatives to choosing a sole trader structure for your business, and these include starting a company, setting up a partnership or more complex structures.
How to Become a Sole Trader
There are three simple steps required to become a sole trader:
- Apply for an Australian Business Number (ABN)
- If you do not want to trade under your own name, you will need to register a business name with ASIC
- If you are expecting an annual turnover of more than $75,000, you are required to register for Goods and Services Tax (GST) with the Australian Tax Office (ATO) (this can be done online, by phone or through a registered tax agent at the time of registering your business or any period after registration)
What are the Advantages of Operating as a Sole Trader
There are many advantages in structuring your business as a sole trader. These include:
- You have full control of your assets and are the primary decision maker for the business
- You are entitled to all the profits gained from your business (subject to if you have employees)
- There are certain tax deduction options available to small businesses
- The start-up costs are minimal as there are not many requirements to become a sole trader
- There are fewer reporting requirements
What are the Disadvantages of Operating as a Sole Trader
Although being a sole trader comes with many benefits, those looking to operate a business as a sole trader should consider the following:
- As a sole trader, you have unlimited liability – there is no legal distinction between your business and personal assets, meaning your assets may be vulnerable if your business becomes insolvent or you run into any liabilities
- Your capacity to raise capital is limited as you cannot offer shares in your business
- You lose the benefit of collaboration and diversity that you get working in partnerships and bigger businesses
- Workers compensation does not exist for sole traders. This can leave you or your business liable if you get injured during work. However, if you do decide to employ others, you will be required take out a workers insurance policy to cover them
A sole trader is a self-employed person. The sole trader structure is appealing because the business structure is simple and cheaper to execute compared to other alternatives.
The main advantages of being a sole trader include that it is cheap, you have full control of the business decisions, and you are able to keep all profits.
This is contrasted against the disadvantages of becoming a sole trader, where your liability extends to both your business and personal assets, it can be harder to raise capital, and you are not covered under workers compensation if you are injured at work.
Contact us if you’d like advice on structuring your business, or any aspect of commercial law.