Hundreds of businesses open in Australia every day. But how should you structure your business? It is crucial that you understand the different business structures available to you. This will ensure you to choose a 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 LegalVision series, we will look at the various different structures through which you can run a business (namely sole trader, partnership, company and trust). We will also explore the advantages and disadvantages of each structure. This week, we will look at running a business as a sole trader and the advantages of doing so.
What is a sole trader?
A sole trader is a person trading on their own. The 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). This structure is not recommended for growth.
There are advantages to running a business as a sole trader. These include the following:
- Low start-up costs: Operating as a sole trader is the cheapest business structure to set up. In fact it is possible that there will be no start-up costs, unless a business name is required.
- Few formalities: There are very few legal and tax formalities or reporting requirements.
- Low administration costs: Operating as a sole trader is the easiest business structure to administer. If you are a sole trader, the administration system required is an accounting or bookkeeping system that produces a statement evidencing revenue and business expenses and the profit or loss of the business.
- Control: You have total ownership and control of the business.
- Profits: You retain all profits of the business.
- Gains: You keep all of the after-tax gains if the business is sold.
- Employees: If you do not have any employees, there is no obligation to pay payroll tax, superannuation contributions or workers’ compensation insurance on earnings from the business. You can choose to pay voluntary superannuation contributions to yourself though.
- Changing structure: It is relatively simple to change your business structure if the business grows or if you wish to wing things up and close your business.
- Income tax liability: If you are starting your business part time whilst continuing to be in full time employment, operating as a sole trader allows you to reduce the tax payable on your employment income if business losses are made (subject to the business satisfying non-commercial business loss provisions).
There are advantages to running your business as a sole trader, particularly when you are first starting out and have limited cash reserves. However there are also disadvantages which must be considered and we will look at these next week in our article entitled “Business structures 2 – the disadvantages of being a sole trader”. You should also consider other business structures, which can also have major advantages to you, and again we will be exploring these other options over the coming weeks.
If you are looking into how to set up your business or are considering changing your business structure to one that is more beneficial to you, please contact LegalVision today. One of our business structuring experts would be happy to provide you with comprehensive advice specifically tailored to your needs. LegalVision can also assist you in setting up your business structure and advising you on what other needs your business may have.