In this video, Pat Mannix from Paris Financial talks about how being a sole trader has its benefits, but how do you know when its time to move to a different business structure? If you're operating as a sole trader you need to be aware of 'unlimited liability' and how that affects you.
Australian Business Structures: Sole Trader
What is a sole trader structure and what are the advantages and disadvantages to consider?
A sole trader structure is the most basic tax structure you can have. It is an individual running their own business.
A couple of key advantages to this structure are:
It costs nothing to set-up as a sole trader, you can just kick off in your own name if you'd like to. It is the simplest and cheapest business structure.
If you run your business as a sole trader, you are the only owner and you control and manage the business.
You can apply for a business name for approximately $80 and as an individual you trade under that business name. You will also apply for an ABN and use your ABN for all your business dealings.
If you're going to turn over less than about $75,000 it's going to keep your costs down. Costs can be huge when you're starting off in a small business so if you are earning less than $75,000 you can look at just running as a sole trader.
Business risk is low so your unlimited liability shouldn't affect things too much and it keeps the costs down.
A sole trader structure can be great for people who are starting off out of a hobby, and starting to create a business but they're not earning a huge amount of income, we would suggest to keep costs down, start as a sole trader structure, and then see how you go.
For your bookkeeping as a sole trader, you can just use an Excel spreadsheet to track your income, track your expenses and track GST too.
You will just pay tax under your own tax file number when lodging your income tax return.
So it's pretty easy!
Some key disadvantages about being a sole trader are:
You as an individual have unlimited liability, because you're trading in your own name. What that means is that if you have your own property and you start trading in business, your property could potentially be exposed to business risk. If you happen to get into a little bit of trouble financially in your business the creditors could chase you down.
-You are legally responsible for all aspects of the business. Debts and losses can't be shared with other individuals.
The other clear disadvantage of being in a sole trader structure is that you can't split your tax, so you can't split it with personal partners or your children and you can't put it to a company.
Other Features to this structure to be aware of are:
You need to report all your income in your individual tax return, using the section for business items to show your business income and expenses (there is no separate business tax return for sole traders)
You can employ workers in your business, but you can’t employ yourself.
If your annual GST turnover is $75,000 or more you will need to register for Goods and Services Tax (GST).
You pay tax at the same income tax rates as individual taxpayers and you may be eligible for the small business tax offset.
Put aside money to pay your income tax at the end of the financial year - usually, you will do this by paying quarterly Pay As You Go (PAYG) instalments
Claim a deduction for any personal super contributions you make after notifying your fund.
As a sole trader you can't claim deductions for money 'drawn' from the business. Amounts taken from the business are not wages for tax purposes, even if you think of them as wages.
So that's a Sole Trader Structure folks!
We certainly recommend it at Paris Financial, for keeping your costs down, setting up part way through the financial year and as a hobby turns into business, sole traders can be transferred into trading trust structure or partnership structure quite easily based on capital gains tax rollovers.
So very simple to move structures and a fairly low cost these days. Sole traders are great to start with, very simple, low cost, but once your business grows, at the right time move into a new structure.
Contact us to book an appointment to discuss!
https://www.parisfinancial.com.au/
Paris Financial Locations:
Blackburn, Victoria, 3130 - Phone: (03) 8393 1000
Mornington, Victoria, 3931 - Phone: (03) 5970 8100
East Melbourne, Victoria, 3002 - Phone: (03) 8393 1070
Email us at: [email protected]
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Information provided is for general purposes only. Before making any decision based on this content, seek advice from our Accountants & licensed Financial Advisors so they can assess your individual circumstances. Paris Financial are not liable for any action you take upon the information on this channel, anyone who relies on the contained content do so at their own risk.
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