When starting a new business, it is important to seriously think about your structure. An overly complicated business structure for a new business may be costly and as such, ill-suited to your business goals. Similarly, a simple business structure may restrict your scope to grow and possibly expand. In our business structure guide, we unpack the different structures as well as their advantages and disadvantages, beginning with sole traders.
A sole trader is an independent individual carrying on a business. The business is owned and controlled by the individual, who also enjoys all of the profits, is directly liable for tax on the income earned and is personally liable for debts of the business. In a sole trader business structure, the business and the individual are indistinguishable. It is also the simplest form of business structure. As no specific law governs sole traders, general laws will apply.
Advantages
Ease of Establishment
A sole trader is the easiest, simplest, cheapest form of business to create with minimal legal formalities.
If the sole trader intends to trade under his or her name, then the name does not need to be registered. However, if the sole trader plans to trade under a different name, then they must register the business name.
Management and Control
A sole trader has the advantage of full control of the business and its employees are accountable only to the sole trader.
Privacy
Sole traders do not need to disclose profits to the public except to the Commissioner of Taxation.
Disadvantages
Liability
If a sole trader incurs any debts, she or he is personally liable and such liability is unlimited. This means that if the sole trader cannot repay his or her debt from the business, they may well have to repay the debt from their personal assets or they may be placed into bankruptcy.
To minimise risk, a sole trader may take out various insurance policies, such as public liability insurance.
Capital
A sole trader has access to limited resources to fund their business and growth. Their reliance is on personal savings or loans or business profits to finance growth.
Continuity of Existence
The benefits of perpetual succession are not applicable to sole traders. The business of sole traders typically ends on the death or bankruptcy of the individual. A sole trader can bequeath the business in a will, however, it does not mean that the gift will be accepted or bind the recipient to continue the business.
Taxation
The sole trader is liable to the tax rate applicable to individual taxpayers on income earned.
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If you have any questions about running your business as a sole trader, or which business structure best suits you needs, get in touch with our commercial lawyers on 1300 544 755. In the meantime, you can continue to read about partnership structures in our next article.
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