Choosing how to structure your business takes some forethought. In Australia, there are four common ways to go about it, and being a sole trader is an easy way to get started, but it’s important that you choose carefully. After all, the structure you choose will impact the licenses you have to obtain, how much you owe in taxes, and your potential personal liability in the event of issues.
Moreover, your business’ structure will also impact whether you’re considered the business owner or another employee along with how much control you hold over your business and, of course, the on-going complexity and volume of paper work you’ll have to deal with.
All of that said, here’s what you need to know about sole trader status and whether or not it’s the right option for you.
The Four Business Structures
Here’s a quick look at the 4 business structures seen most often across Australia:
This is the simplest of all four structures and it also gives you the most--as in complete--control.
While more complex than sole trader structure, having a company can limit your liability because it makes your business a separate legal entity.
If you and one or more others are distributing income or losses, a partnership maybe the right structure for you.
In a trust, the trustee is responsible for handling a business’ operations. There a few different variations of trust, but discretionary trusts (aka famiy trust) are the most common.
What It Means To Be A Sole Trader
Anyone can start a business in Australia. Just be over 18 and register for an ABN and you're a sole trader. Ultimately, being a sole trader is the simplest way to go about things, and it means:
- You’ll file taxes with your individual tax file number.
- You’ll report all business income on your individual tax return and pay tax at your marginal tax rate
- You’ll apply for an ABN and use it in your business dealings.
- You’ll have to register for GST if your annual GST turnover exceeds $75,000.
- You may be eligible for the small business tax offset.
Basically, as a sole trader, everything you do as a business comes straight back to you as an individual, that includes income, losses, and liability.
Additionally, while it’s natural for many business owners to think of any money they take from their business as a wage, these amounts are not wages when it comes to tax reporting.
As a sole trader, you aren’t able to claim deductions for any money you draw or take from the business, because you can not derive income from yourself. This is known as the mutuality principle.
The Pros and Cons Of Being A Sole Trader
As with any decision to be made regarding your business venture, there are considerations you have to think about before deciding on the right structure. Here’s a look at some of the pros and cons of being a sole trader;
The Pros Of Being A Sole Trader
- Minimal reporting requirements compared to other structures.
- Retain complete control over your business’ assets and decisions.
- Lower administrative costs compared to other structures.
The Cons Of Being A Sole Trader
- Unlimited liability, putting all of your personal assets at risk.
- Doesn’t enable you to split or retain profits or losses.
- Assigns personal liability to pay taxes on all the income you earn.
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Can I Change My Legal Structure?
The great news is, no matter what structure you choose for your business, you can always make the necessary legal changes and restructure it down the road. This is often essential as businesses grow and expand, but it does take time and money to make these changes.
For some businesses, it may be advantageous to structure your business based on its current size. However, other businesses may want to be proactive if they have rapid plans for growth or expansion, in which case getting a business accountants opinion (like umm us) about the appropriate structure would be your best bet.
Can I Hire Employees As A Sole Trader
Generally, the sole trader business structure makes the most sense for individuals who will be operating their business entirely or almost entirely on their own. If you plan on hiring full-time employees, another structure will likely make more sense.
With that said, you can still employ people to help you run your business even if you have formed your business with the sole trader structure. However, that’s where things begin to get more complicated.
Any time you hire employees, you must comply with other obligations, like having workers’ compensation insurance and making superannuation contributions. You should seek advice via our accounting and tax services to make sure you’re in compliance and ensure that the sole trader structure is the best option.
One thing you should note is that, as far as tax laws are concerned, you cannot be an employee of your own business if you hold sole trader status. This generally limits some tax minimisation strategies like salary sacrificing your motor vehicle.
Getting Started As A Sole Trader
If you have decided that sole trader status is the right business structure for you, You’re in luck. It’s super easy to setup a business as a sole trader and begin operating. You’ll also retain complete control over your business’ assets and all decisions relating to your business.
When it comes to reporting, being a sole trader also means fewer forms. Generally, it also means lower costs in maintaining and administrating your business since reporting requirements are minimal. One thing you will have to do is keep 5 years of financial history on your business at all times.
As far as handling your business’ income, you’ll lodge your tax returns using your individual tax file number, or TFN, and you although you technically don't need a separate bank account it is highly recommended for easier accounting and visibility on what the business is doing, and keeping you accountable on your personal spending.
Structuring your business isn't a one size fits all approach, but it can mean the difference of hundreds of thousands of dollars in taxes and losing personal assets if you get it wrong. So please contact us and get advice on which structure is most suitable for you.