When launching a new business, it is first necessary that you understand the business structures available to you. This enables you to choose the best business structure that manages your risks, protects your assets, limits your liability, manages your tax obligations and gives you a strong platform for future growth.

In this business structures series, our articles focus on the various structures through which you can run a business. Namely, a sole trader, partnership, company and trust. Our last article looked at the advantages of running a business as a sole trader, and we now turn to looking at the disadvantages.

What is a Sole Trader?

As previously discussed, a sole trader is an individual trading on their own. Their business revenue is treated as personal income, and the individual is personally liable for all aspects of the business (and accordingly, their personal assets are at risk). We do not recommend this structure if you intend to grow your business.

What are the Disadvantages?

Below, we have outlined the disadvantages to running a business as a sole trader.

Income tax liability

Business profits are taxed as personal income. Consequently, when your business starts making a profit, your tax rate will most likely increase. This is particularly true if you are employed as well as working as a sole trader, as your business income will be added to your employment income. Further, you cannot split business profits or losses with family members, and you personally liable to pay tax on all income your business generates.

Legal Liability and Asset Protection

If your business incurs large debts and then fails, creditors can attack your personal assets to repay the business’ debts. Further, your personal and business assets will be at risk if an individual or company makes a legal claim against you.

Workers Compensation and Superannuation

Sole traders do not pay workers compensation insurance on earnings from the business, as individuals cannot employ themselves. This also means, however, that if an accident occurs, the sole trader cannot receive workers compensation benefits. A sole trader should then take out adequate sickness and accident insurance to protect themselves.

Sole traders can only claim a tax deduction for superannuation contributions as a self-employed person.


As discussed in our earlier article in this series titled “The Advantages of Being a Sole Trader”, there are advantages to running your business as a sole trader, particularly when starting up your business with limited cash reserves. In fact, it may be the only financially viable option at the outset.

There are, however, disadvantages to running your business as a sole trader, particularly if you are trying to grow your company and want to make it profitable or if you want to limit your personal liability. You need to be aware of these issues. You should also consider and understand other business structures, and their respective strengths and weaknesses. Again, we will be exploring these other options over forthcoming articles.

If you are looking into how to set up your business or are considering changing your business structure, get in touch with LegalVision today. One of our business structuring experts would be happy to provide you with comprehensive advice specifically tailored to your needs. We can also assist you in setting up your business structure and advising you on what other needs your business may have.

COVID-19 Business Survey
LegalVision is conducting a survey on the impact of COVID-19 for businesses across Australia. The survey takes 2 minutes to complete and all responses are anonymous. We would appreciate your input. Take the survey now.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. For just $199 per month, membership unlocks unlimited lawyer consultations, faster turnaround times, free legal templates and members-only discounts.

Learn more about LVConnect

Jill McKnight
Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

  • By submitting this form, you agree to receive emails from LegalVision and can unsubscribe at any time. See our full Privacy Policy.
  • This field is for validation purposes and should be left unchanged.
Our Awards
  • 2019 Top 25 Startups - LinkedIn 2019 Top 25 Startups - LinkedIn
  • 2019 NewLaw Firm of the Year - Australian Law Awards 2019 NewLaw Firm of the Year - Australian Law Awards
  • 2020 Fastest Growing Law Firm - Financial Times APAC 500 2020 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review 2020 AFR Fast 100 List - Australian Financial Review
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards 2020 Law Firm of the Year Finalist - Australasian Law Awards
  • Most Innovative Law Firm - 2019 Australasian Lawyer 2019 Most Innovative Firm - Australasian Lawyer
Privacy Policy Snapshot

We collect and store information about you. Let us explain why we do this.

What information do you collect?

We collect a range of data about you, including your contact details, legal issues and data on how you use our website.

How do you collect information?

We collect information over the phone, by email and through our website.

What do you do with this information?

We store and use your information to deliver you better legal services. This mostly involves communicating with you, marketing to you and occasionally sharing your information with our partners.

How do I contact you?

You can always see what data you’ve stored with us.

Questions, comments or complaints? Reach out on 1300 544 755 or email us at info@legalvision.com.au

View Privacy Policy