A Comprehensive Guide to Starting Your Own Business as a Sole Trader

If you’re considering launching your own business in the near future, you will need to perform some basic research to understand what your legal obligations are and the steps you will need to take to make your business viable.

In this guide to starting your own business as a sole trader, we take a look at legal business structures and their associated tax implications.

Business structure

The kind of business structure you select has an influence on your startup expenses, asset protection, tax responsibilities, amount of corporate control, and more.

Definition of a Sole Trader

The simplest and most cost-effective sort of business is that of sole trader. The term “sole trader” refers to someone who runs a business on their own and is the only proprietor. As a sole trader, you take legal responsibility for and control over every aspect of the company’s operations. You can hire employees for your company, but you must pay their superannuation.

You’re also in charge of your own insurance, so make sure to compare sole trader insurance online to get the cover that works for your business.

Any debts or losses incurred as a result of your business are solely your responsibility and cannot be shared with others.

Hairdressers, business consultants, freelance writers, and craftsmen are examples of persons who may want to become sole traders.

Other business structures to be aware of before deciding to become a sole trader

Partnership

Setting up a partnership is also simple and inexpensive. It entails two or more people working together to start and operate a business. The partners split any profits and losses amongst themselves. General, limited, and incorporated partnerships are available, so you’ll need to research each form. The distinctions, in general, are related to company management and the amount of culpability that each partner is willing to accept.

Corporation

A corporation is a different legal entity from a sole trader or partnership and is relatively more complicated.

A firm, like an individual, may sue, be sued, and incur debt.

However, your responsibility as an individual is restricted if you form a corporation. You are not held responsible for the company’s debts.

That said, you still have a financial duty to pay any overdue share amounts if they become due.

If you’re a corporate director, you might face personal liability if you’re proven to have broken any applicable legal requirements.

Trust

Trusts are costly to set up and administer because they require a person (the trustee) to hold assets or property for the benefit of others. Beneficiaries are the persons who get benefits.

The trustee is legally liable for all company activities while operating a firm as a trust.

Trusts, like businesses, require annual administrative labor. In addition, a legal trust deed must be created.

It’s worth noting that a trustee can also be a corporation.

Pre-requisites for launching as a sole trader

Setting up a sole-trading firm isn’t complicated or time-consuming. To begin, select whether you wish to trade under your own name or under a distinct business name. If you choose the former, moving ahead is straightforward. However, because you’ll be trading under your own name, you’ll just need to apply for an Australian Business Number (ABN). This is an 11-digit number that is unique. It’s used to identify your company to the government and others in a variety of ways. Fill out the online form at the Australian Business Register (ABR) to apply for this number. Allow around half an hour to finish the procedure if you have your tax filing number (TFN) and other important information accessible. You’ll use your ABN for any future business operations after you’ve acquired your ABN (which is free to apply for).

Bear in mind that there is no legal entity associated with this business name. It also doesn’t provide you legal protection or ownership over that name – you’ll have to trademark it to acquire that.

The name you choose for your company should be relevant to your activities and as snappy and memorable as possible.

Check the National Names Index on the ASIC website before you make up your mind on a name. Pick something that is currently available.

Make sure you can also get an appropriate domain name (website address) at the same time, as most businesses these days demand an internet presence. Also, check to see whether the company name has already been trademarked.

There are some circumstances when you may get around this, but it may limit your trade rights and increase your legal expenditures.

If at all possible, keep your sole trader business out of these muddy waters.

If you already have an ABN, you may apply for a business name using the Business Registration Service or the ASIC website once you’ve found one that’s available.

Tax implications

When you set up as a sole trader, you get taxed as an individual and pay personal income tax rates.

You utilize your individual TFN when lodging your yearly return; there’s no separate business tax return to submit.

Sole traders must record all relevant trading data on their return using the business items section.

Break up transactions into revenue and costs on your documentation.

This trading activity’s net profit or loss is added to/subtracted from your other taxable income.

Because you have an ABN for sole trader purposes, your clients aren’t required to withhold tax from your payments during the year if you include it on all of your invoices.

Furthermore, because you are taxed as a person, you may be eligible for a small business tax credit.

There’s a chance you can also claim a deduction for any business assets you purchase throughout the year.

You can also deduct any personal contributions to a retirement plan. However, you must notify your superannuation fund of your intentions.

Remember that any money you “draw” from your company is not deductible.

The money you withdraw from your business to spend as “wage” isn’t classed as a business expense for tax purposes.

Goods and Services Tax (GST)

Register for GST if you estimate your annual business turnover (total cumulative invoice value for the financial year) will exceed $75,000.

Advantages of sole proprietorships

One of the main advantages of single trader businesses is how simple they are to set up and operate. They’re also cost-effective because there’s not a lot of paperwork involved. You’ll have minor reporting responsibilities, which you may handle yourself or have your accountant or lawyer review. Furthermore, you maintain complete control over all business decisions and assets, as well as the ability to balance business losses against other sources of revenue (subject to conditions).

Another significant advantage of a sole trader arrangement is the ease with which you may modify the business structure if your firm expands and you want to convert to a partnership, corporation, or trust. Similarly, it is simple to close down your firm.

However, operating a sole trader firm does have a number of drawbacks.

Disadvantages of sole proprietorships

The most important disadvantage to be aware of when it comes to sole trading is that it exposes you to risk. Your personal assets are in danger if you are sued or go bankrupt if you have limitless liability. Another disadvantage is that as a sole trader, you can’t benefit from some of the tax benefits that may be on offer in alternative company structures. There is no way to lower tax liability by splitting company earnings or losses with family members. You are responsible for paying any taxes on your business income.