Which structure is right for me? Business advantages and disadvantages for sole traders.
Sole traders opt to operate their businesses as individuals, without any business structuring. Sole traders often trade under their personal name, while others will register a Business Name with the Australian Securities and Investment Commission.
Flexibility
Being a sole trader provides you with ultimate control over your business and its operations. However, a downside to operating your business as an individual means that there is no division between personal and business assets. This means that personal assets can be utilised to make payment of business debts, which can assist with liquidity and maintenance of the business, but also puts your personal assets at risk of creditors.
A sole trader can easily incorporate a company or establish another business structure at a later date or as the company expands. The flexibility afforded to a sole trader can allow the company to grow and develop without any pre-established restrictions. This can allow a sole trader to gauge the success and potential direction of a business venture once it is established.
Cost
Operating as a sole trader is, for obvious reasons, the cheapest option for running a business. It is also the easiest to administer, as it does not require any reporting (other than that relating to normal income tax requirements) and is not subject to onerous regulations (such as those found within the Corporations Act).
Further, unless a sole trader employs individuals when expanding the business, a sole trader is not considered to be an ‘employee’, and thus a sole trader is exempt from PAYG withholding, superannuation and WorkCover. It is highly recommended that a sole trader take out insurance to ensure that the business can be sustained in the event the sole trader is sick or injured. In addition, sole traders are often required to invest significant amounts of their own time to ensure the smooth running of the business (where there is no expense of support staff) and are not considered employees so have no entitlement to annual leave or similar benefits.
There are little to no costs associated with establishing a business as a sole trader. There are costs associated with registration of an Australian Business Name, if the sole trader decides to do so. There may also be costs associated with obtaining software for the management of the business, including accounting and invoicing software for the purpose of keeping financial records.
Taxation benefits
Losses associated with the running of the business can be offset against other personal income, as the business is treated as personal income for reporting purposes. Additionally, any income is taxed at personal income tax rates.
Funding
A sole trader may find it more difficult to obtain financial funding as there is less likely to be a large sum of capital available. This means that a sole trader may have to rely on the provision of credit, which can be risky especially where the success of a business may be yet to be determined. However, as stated above, personal income and assets can be utilised to fund the business and this flexibility can be useful in situations where the business requires more funding.
Summary
Starting a business as a sole trader is very popular, as it is cost effective, there are taxation benefits and significant advantages relating to the flexibility of the business. However, there is also a substantial amount of personal risk that is involved where you enter into business transactions (including overdraft accounts and credit facilities). You should always seek professional legal advice before starting your business to determine whether a sole trading structure is best for you.
Nautilus Law Group can help you weigh the the risks and benefits of starting your business as a sole trader, and can provide advice on the best structure for your start-up. We welcome you to contact our offices on (07) 5574 3560 or email info@nautiluslaw.com.au. We thank you for considering Nautilus Law Group.
Submitted by: Katrina E. Brown BA JD ATIA TEP SSA
