Are you aware that more than 800 000 registered sole traders are active in Australia, making it the second most preferred business structure in the country?
If you want to take action and start this kind of business, you should be aware of the merits and demerits of the business structure in order to make an appropriate decision.
This blog is about the benefits and drawbacks of starting and managing a sole trader business in Australia so that you can determine whether this is the best course for your new business.
Understanding Sole Tradership
Given how the framework of business ownership is structured in Australia, the simplest business one can start is as a sole trader. When you register as a sole trader, you in a way declare that you are the only owner and operator of the business.
This means the operation of the business, the assets contained therein, and the processes that lead to various decisions are all in your control and so are the risks I.e. every aspect of the business is your liability.
Key Aspects Of Sole Trading
| Aspect | Details | Impact |
|---|---|---|
| Setup Costs | Minimal registration fees | Lower initial investment |
| Personal income tax rates apply |
Progressive taxation as income increases |
|
| Liability | Unlimited personal liability | Personal assets at risk |
| Control | Complete business control | Independent decision-making |
| Growth Potential | Limited by personal resources | May restrict business expansion |
Advantages of Being a Sole Trader
1. Complete Control Over Business Operations
In this case, you are the boss. You dictate every thing about the business from the prices, the market, and even the day to day running.
This helps you use your business how you want it and according to your principles without the need for seeking any consents like partners or shareholders.
2. Simple Set-Up And Low Start-Up Costs
In Australia, it is easy to establish a sole trader business. An Australian Business Number (ABN) and a business name registered with Australian Business Register (ABR) are the only requirements.
This ease of setup helps to maintain the low start-up costs which is an advantage for people who do not have much money to invest.
Requirements for Setting Up as a Sole Trader:
| Requirement | Details |
|---|---|
| Australian Business Number (ABN) | Free to apply through the Australian Business Register |
| Business Name Registration | Necessary if operating under a name other than your own |
| Tax Registration | Contact the Australian Tax Office (ATO) to link ABN and tax details |
3. Simplified Tax Obligations
Taxation is relatively straightforward for sole traders. The business’s income is considered part of your personal income, so you pay tax at the individual income tax rate. If you’re an Australian resident, you can access the tax-free threshold (up to $18,200 in the 2024-2025 tax years), meaning you may not owe any tax if your taxable income is below this amount.
4. Ability to Offset Business Losses
One major tax benefit is the ability to offset business losses against other income sources, such as income from a job or investments. This can help reduce your tax bill, especially during the early stages of your business when profits might be low or non-existent.
5. Keeping All After-Tax Profits
Unlike other business structures, sole traders don’t need to split profits with partners or shareholders. Once taxes are paid, you keep all remaining profits, a direct reward for the hard work and risks involved in managing the business.
Disadvantages Of Being A Sole Trader
1. Full Responsibility For Debts And Liabilities
As a sole trader, you assume complete liability for the business. This means there’s no distinction between personal and business assets, and your personal property is at risk if your business incurs debts or faces legal action.
Potential Risks for Sole Traders:
| Risk | Description |
|---|---|
| Personal Liability | Personal assets are at risk in case of business debts |
| Public Liability | Liability if a third party is injured by business activities |
| Limited Financial Flexibility | Sole reliance on personal funds for expansion |
2. Limited Access To Funding
Without partners or shareholders, sole traders must rely solely on personal funds to finance and grow their business. This can limit expansion opportunities and may make it challenging to attract investors or obtain significant loans.
3. Higher Tax Rates On Increased Income
Although taxation is straightforward, one downside is that you miss out on the flat corporate tax rate available to companies. When your business starts generating substantial income, this could push you into a higher individual tax bracket, increasing the overall tax burden.
4. Complexity With Gst Registration
If your business’s annual turnover exceeds $75,000, you are required to register for Goods and Services Tax (GST) with the ATO.
This adds another layer of tax responsibility, which can be challenging for sole traders who may lack the resources to manage these additional requirements easily.
5. Challenging To Sell Or Transfer Ownership
Sole trader businesses are closely tied to the individual, making it harder to transfer or sell the business. Unlike companies, which can be sold as a separate legal entity, sole trader businesses typically require a full transfer of all assets and liabilities, which can complicate the selling process.
Ready To Start Your Sole Trader Journey?
Deciding to become a sole trader can be a big step, but you don’t have to navigate it alone. At KPG Taxation, our team of experienced sole trader tax accountants is here to guide you through every aspect—from managing tax obligations to planning for growth.
