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5 Steps to Form a Sole Proprietorship

As a simple business structure to set up, operate and dissolve, a sole proprietorship is a common choice for many across Australia. Commonly referred to as a sole trader, a sole proprietor is exactly as the name suggests. It refers to the sole person responsible for all aspects of the business, including its debts. Some key features of a sole proprietorship distinguish it from other business structures. This includes that there are fewer set-up costs and steps. This article will take you through five key steps to form a sole proprietorship.

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1. Apply for an ABN

One of the first steps required to form a sole proprietorship is to apply for an Australian Business Number (ABN). Although this is not a requirement, particularly if your sole proprietorship is new, some benefits of registration make it worth obtaining. 

For example, one of the major benefits of an ABN is that it will confirm your business is legitimate to others. This will help you attract clients and suppliers. Further, you will need an ABN to register a business name.

You will need to complete a form and apply online via the Australian Business Register (ABR) to apply for an ABN.

2. Register a Business Name

The second step to forming a sole proprietorship is registering your business name. In many cases, this is a legal requirement. However, this is unnecessary if you are trading under your own name, this is unnecessary.

Before registering your business name, you must check if someone is already using your proposed name. If another business has already taken your business name, you will need to select a different one. At this stage, you might also wish to consider registering a domain name to assist with promoting your business. Therefore, you should also ensure that your domain name is available.

Once you have confirmed your name is available for use, you can register it through the Australian Securities and Investments Commission (ASIC). Once registered, you will also need to contact the Australian Taxation Office (ATO) also link your ABN and business name. 

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3. Obtain Licences and Permits

The third step to forming a sole proprietorship is to apply for any relevant licences and permits. These will differ depending on the industry your sole proprietorship will operate and the state your business will operate.

For example, suppose you are operating a cafe. In that case, you might need a certificate to handle food, a licence to serve food and a permit to place furniture outdoors if you have outdoor seating. 

To better understand the licences required for your sole proprietorship, the Australian Business Licence and Information Service (ABLIS) is an excellent starting resource.

4. Open a Bank Account

Although not essential, you should consider opening a separate bank account for your business. The finances of a sole proprietor are linked to the sole proprietorship, as there is no separate entity.

Despite it not being a requirement, it is still a good idea to open a separate bank account for your business, particularly if you have employees or conduct many transactions. This will make it easier to reconcile your business expenses from your personal expenses at tax time and ensure that your business has sufficient cash flow.

5. Obtain Insurance 

Again, although not always an essential step, it is worth considering obtaining insurance for your business. Sole proprietors are subject to unlimited liability, meaning that their personal and business finances are intrinsically linked. 

In the instance the business cannot pay its debts, the sole proprietor’s personal assets are at risk. This is where insurance comes in. Sole proprietorships are riskier to operate than other businesses, increasing the need for small business insurance or general liability insurance. 

You might also wish to obtain income protection insurance, personal accident insurance or insurance for your employees if you have any.

Although it comes at a cost, insurance provides peace of mind, which you cannot put a price on.

Key Takeaways

As a simple business structure to set up, operate and dissolve, a sole proprietorship is a common choice for many across Australia. Some key steps to form a sole proprietorship include: 

  • apply for an Australian Business Number (ABN);
  • register a business name; 
  • obtain licences and permits;
  • open a bank account; and
  • obtain insurance.

If you need help forming a sole proprietorship, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is a sole proprietorship?

A sole proprietor, or a sole trader, refers to a person who solely owns and operates a business. A sole proprietor and their business are treated as one single entity, making the sole proprietor responsible for all of the business’ losses.

How can I form a sole proprietorship? 

Some key steps to form a sole proprietorship include applying for an Australian Business Number (ABN), registering a business name if necessary and obtaining any relevant licences and permits. Further, you should also consider opening a separate bank account for the business and obtaining insurance.

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Emily Young

Emily Young

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