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When starting a business for the first time, a sole trader structure is flexible, easy to manage and straightforward. As you are conducting business under your own name, you do not need to worry about partnership issues or the administrative burden of registering and operating a company. However, you might be considering expanding your business as a sole trader. This article explains various legal considerations for expanding as a sole trader.

What Is a Sole Trader

A sole trader is an individual running a business. It is the simplest and most cost-effective business structure. As a sole trader, you are legally responsible for all elements of your business. You will be responsible for all the decisions relating to the operation and management of your business.

Growing as a Sole Trader

Operating as a sole trader gives you the ability to flourish and expand your business rapidly due to the control you have over it. However, being a sole trader can also be stressful and challenging at times. This is because, as the owner and manager of your business, you are essentially legally responsible for everything. The fact that you, as a sole trader, have unlimited liability means that all of your personal assets (not just those belonging to the business) are at risk if things go wrong. 

Additionally, you cannot split business profits or losses with other individuals, including your relatives or family. Hence, you will be personally liable to pay tax on all the income from your business. Operating as a sole trader is also not the most flexible of business structures and will not accommodate a growing business. 

Factors to Consider When Expanding

As your business grows, you may have noticed that you are starting to outgrow your sole trader business structure. This is particularly relevant if you have started hiring employees, taking investments or owning assets through the business.

You might also be considering a change to your business structure so that you can implement or restructure the corporate governance side of your business. For example, you might be thinking of appointing a board of directors or an advisory committee. Usually, you would look to do this to increase your business profitability, improve your internal processes and adjust to the shifting needs of your business. 

Corporate governance is helpful because it ensures the best-suited people are the ones making the necessary and right decisions for your business. Having a proper corporate governance model can reduce confusion about who might be responsible for certain decisions. If you intend to grow your business, having established procedures and processes in place may ensure that your growth occurs smoothly.

When Is the Right Time for Change

Ultimately, the right time to expand and grow your business comes down to the specific characteristics of your business. Certain factors might affect your decision as to whether a different structure would be better suited. Factors include:

  • tax advantages; 
  • any particular growth plans you may have; and 
  • whether you are looking to gain particular legal protections. 

When debating whether to change from a sole trader to a different structure, you should ask yourself the following questions:

  • What are the short, medium and long term goals you have in mind for your business?
  • How do you want to generate income? Will this be via dividends, or are you looking to generate income return through the eventual sale of your business?
  • What impact would your chosen structure have on the taxation of your business and to you? 
  • How much will it cost you to set up and maintain the structure you have chosen? 
  • Will your chosen structure affect your personal liability? Will your personal assets be at risk? 

Different Business Structures

It might be helpful to list the four most common types of business structures in Australia below:

  • a sole trader is the simplest structure that gives you complete control over the affairs of your business;
  • a company is a more complex structure but can be useful as it limits your liability. This is because, under the law, companies are a separate legal entity;
  • partnerships consist of two or more people who have agreed to distribute income and losses; and
  • a trust is an obligation imposed on a person (a trustee) to hold property or assets (such as business assets) for the benefit of others (the beneficiaries). 

Most commonly, an expanding sole trader business would look to change into a company. A company is an excellent option because the law regards it as a separate legal entity. Accordingly, you will not generally be held personally responsible for the actions of your business. A company structure is also helpful as it continues to exist even after certain business owners and directors can no longer run its operations.

Additionally, it is essential to seek legal advice first before deciding whether a company structure is the right one for your evolving business. In deciding whether a company structure could be suitable for your business:

  • ensure you know what a company is and what is involved when you register;
  • understand the different costs and legal reporting requirements for sole traders versus companies; and 
  • read about the tax differences between a sole trader and a company.

Key Takeaways

There are many benefits of operating a sole trader structure for your business. However, it offers limited liability protection to you, and it is not the most flexible structure available to businesses. Hence, if you are in a position where your business is growing and expanding, this may no longer be the best option for you. A company, amongst other structures, could provide you with a lot more flexibility and legal protection. If you would like more information about the company structure and whether expanding your sole trader is right for you, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a sole trader?

A sole trader is a type of business structure where you conduct business in your own name and take on all liability. It is the most straightforward form of business and is popular amongst individuals starting a business for the first time.

Is there opportunity to grow as a sole trader?

As a sole trader, you can certainly build up business assets and expand your workforce through employees. However, this particular structure does not leave a lot of room for growth. Many sole traders often consider changing into a company structure when the time is right for their business to expand.

What are other common business structures?

There are four main business structures. These are sole traders, partnerships, companies, and a trust structure.

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