If you want to operate a business in Australia, one of the most important things is to decide on the right business structure based on your requirement. Choosing an overly complicated structure may be ill-suited to your business objectives and you may incur increased costs in the process.
At the same time, while a simple business structure is easier to handle and less expensive, it may restrict future growth and expansion. In this article, we analyse the pros and cons of operating as a sole trader from a legal perspective.
Who Is a Sole Trader?
A sole trader owns and controls 100% of his or her business, is entitled to the entire profits and liable to pay full taxes on the revenues. As a sole trader, you are also responsible for repayment of debts. From a legal standpoint, a sole trader is indistinguishable from the business entity.
Sole traders are not governed by specific legislation. They are regulated by general laws.
Advantages of Setting Up Your Business as a Sole Trader
This is the simplest, easiest and cheapest way to set up your business with minimal legal formalities. Sole traders are also in a more empowered position to make decisions and incorporate changes.
You also have the option of offsetting losses by assessing other income streams. For instance, if you suffer a loss in income from personal property, you can offset the loss against business revenue.
Tax-Free Considerations for Sole Traders
Tax-free thresholds for sole traders is pegged at $18,200 for 2019-2020. A sole trader business is taxed as part of your income. Company structures, on the other hand, do not enjoy any tax-free threshold; you must pay tax on every dollar earned.
There are no annual or registration fees for sole traders and business licensing fees are significantly lower compared to more complex business structures.
Disadvantages of Operating as a Sole Trader
Since you are solely responsible for liability, you may be asked to secure loans by putting up personal assets as collateral. Similarly, you may not be able to raise capital by offering shares. So, if you require additional financing, you may need to approach banks or other lending institutions for external funding.
You also need to adhere to Australian law when it comes to dismissing employees.
How to Set Up Your Business As a Sole Trader
You need not register the name of the business if you are going to operate it under your name. However, if you plan to operate under a different name, you need to register your business.
- Register for an ABN or Australian Business Number
- If you plan to operate under a different trade name, register your business with the ASIC (Australian Securities and Investments Commission).
- We also advise you to register your business for GST (Goods and Sales Tax) if you expect business income to exceed $75,000 per year.
As an experienced commercial legal firm, Owen Hodge Lawyers offers expert legal advice to clients who wish to set up businesses in Australia. Our in-house experts will update you with the latest regulatory, tax and business insurance requirements.