There are several main advantages and disadvantages of becoming a Sole Trader in Australia and you need to be aware of what they are. This is not the be-all-and-end-all list and there are dozens of other more complex sole trader advantages and disadvantages that may affect your small business and the amount of tax that end up paying as a result. However, these are the main ones which should be fully understood for the time being.
Sole Trader Advantages
- Easy to set up and simple to manage
Becoming a sole trader in Australia is as easy as applying for an ABN (Australian Business Number) and then registering a business name with your local Office of Fair Trading (unless you plan to use your own name as your business name)
- You have complete control over the business
As a Sole Trader, you are the business. You control the entire flow and direction of the business and you make all the business decisions.
- Limited Financial Reporting Requirements
This is one of the big sole trader advantages for people who want to focus more on the running, managing and growing of the business rather than having to worry about submitting financial reports to various authorities and stakeholders. Even still, even as a Sole Trader, you will be required to submit certain reports about your business to show how your business is doing.
- Sole Trader Tax Rate is the same as the Personal Income Tax Rate
Basically, as a sole trader you are taxed in exactly the same way as if you were when you worked for a company that paid you a weekly income. This can provide you with several tax advantages for instance, if your business makes a loss in its first year, you may be able to offset that loss against any other income you made during the year. For for information about possible Sole Trader Tax Advantages, speak to an accountant.
- No Superannuation needs to be taken out of your Business Income
Remember, when you worked for a company, they took out about 8-10% of your salary for superannuation. As a Sole Trader, you have the luxury of keeping all your net salary and not having to put any money aside for superannuation.
There are many other more complex Sole Trader Advantages such as “indexation”, not having to pay “payroll tax” or “workers compensation” and so on, but these should be left to your accountant in deciding which of these more complex sole trader advantages apply to the small business you are starting.
Sole Trader Disadvantages
- Income Splitting with Family Members is not an option
Australian businesses pay a large chunk of their business profits in taxes at the end of each financial year. Many husband and wife businesses (or family-owned businesses) can benefit from what is called “income splitting” if the husband and wife are genuine working together on the business and as a result, this can heavily reduce the amount of tax you pay each year. Unfortunately though, as a Sole Trader you are not able to take advantage of this. If you feel that “income splitting” applies in your case because you are either working side-by-side with your husband, wife, parter, family-member or business partner, a Partnership business structure may be more suitable for you as it is less restrictive when it comes to income splitting.
- Unlimited Liability (very important – you must understand this one)
A Sole Trader’s “Unlimited Liability” is probably the most important disadvantage to be aware of when becoming a sole trader. If something bad happens to the business and you end up owing a lot of money (from your business), you personally are liable (and responsible) for these debts on a personal level and any assets that you personally own such as a house, furniture or plasma TV can be taken away from you to cover your debts as a Sole Trader.
For this reason alone, some people prefer to start their business as a Company because when you register your business as a company, unlike being a Sole Trader, you are separate from the business and if your business ends up going bankrupt (and owing lots of money), no one can touch your personal assets because you are a separate entity from the company.
Now that you are aware of the main Sole Trader Advantages and Disadvantages, you may wish to compare starting a small business as a sole trader with Starting a Company. Alternatively, you may want to read more about Choosing the Right Business Structure. If you’re convinced that starting your small business as a Sole Trader is the most suitable option for you, you should have a quick chat with an accountant (even if it’s over the phone for a moment or two) as they can either confirm this with you or suggest a better business structure for your business based on whichever business structure will have you paying less tax. If you haven’t already, it may be worthwhile having a glance over the Sole Trader Tax Guide.