Sole Trader

A sole trader is the most basic business structure there is. It’s simple, cheap and has the fewest reporting requirements. While it has it pros – it has some cons as well.

How does it work?

You use your Tax File Number (TFN) to lodge your income tax return as you normally do and everything gets lumped in with your normal income tax. So you pay tax at the income tax rate. To put that another way, you get taxed as an individual exactly as normal. It’s just that you have (so to speak) some “extra” income.

You should consult an accountant as soon as you start so you know what records you have to keep, what you can claim and how you can claim it. Also to find out when you should start to consider changing into a different business type for tax and other reasons.

You can claim deductions for your own superannuation contributions and for business expenses.

You need an ABN and you have to use it in all your business dealings.

You only have to register for GST if you turnover is more than $75,000 a year. If you don’t charge for GST then you need to say so on your invoices.

Keep in mind

You are the head honcho and you answer to no one. But you also can’t share your losses, debts or profits with anyone else.

MAKE SURE YOU SET ASIDE MONEY TO PAY THE TAX MAN! Often you will need to do PAYG (Pay As You Go) quarterly instalments. You do not want to be stuck with a huge debt at the end of the year that you didn’t see coming.

You have to keep your financial records for at least 5 years.

You don’t have to have a separate bank account for the business but you really should. It makes tax time and keeping track much simpler. You will be amazed at how many little things are needed for even the simplest business. Paying it out of (or being paid into) a separate bank account is a huge plus when it comes to keeping track. It’s also good for working out how much money you are really making.

You can’t give yourself a wage (from the point of view of tax) but you should “pay” yourself so you know how profitable your business really is.

You can have employees but you have to pay their super and workers comp as well as their wages. There are other requirements as well. (Again, I would advise consulting an accountant for this). But sole traders can often find it difficult to retain really good employees as they are seen as more risky and limited kinds of businesses to work for.

If you start employing people you will have to register for Pay As You Go Witholding. Apart form PAYGW there is also the matter of Single Touch Payroll – which is now compulsory. And don’t forget superannuation. All in all – get a tax agent. Much easier.

Pros

You are your own boss and answer to nobody.

You keep every cent you make.

You can (under some circumstances) offset business losses against other income like your wages from another job, share dividends and the like.

Starting a business as a sole trader is very cheap and simple.

Operating as a sole trader is pretty easy as the reporting requirements are fewer.

It’s your own business, so you are not an employee and don’t have to pay payroll tax, superannuation (but you should make make some provision for the future) or workers compensation.

It’s also pretty easy to change into a different business structure when you are ready.

If you need to, closing down the business is very easy.

Cons

Yes, you do keep all the money you make but you also have to personally pay back all debts. If you don’t it can be taken out or your personal assets – not just your business assets.

Getting a loan can be very hard work compared to being a company or a partnership.

You are not covered by workers compensation if you get injured at work or get sick. (So you may not have any income but you might still have work expenses that you are personally liable for. GET INSURANCE!)

Taxation can be a pain as you have to personally pay tax on all you make (you can’t split it with the family).

Forget about holidays.

You are taxed as a normal person (which is nice if you are small but sucks if you grow big enough).

Every single decision is your responsibility – which is hard work and also no fun if you get it wrong.

Some extra things to keep in mind

YOU ARE LIABLE! (Just to say this again) Everything thing you own is at risk if something goes wrong and you rack up debts. You could lose your house, your car and your underpants!

Think about insurance. There is no workers comp for you. So if you break a leg on the job there will be no income coming in – but your business may well still be racking up expenses – expenses you are personally liable for. Depending on your kind of business, you should also think about liability insurance. Just to cover yourself against being sued or held responsible for accidents, damage or injuries. We have all heard stories about utterly ridiculous litigation against some poor bugger that left them penniless. Once again, You. Are. Personally. Liable!

Consult an accountant if you are starting out as a sole trader – or if you have never done so before. There are a lot of sole traders in Australia. Some sail through without a problem but some sink because of simple mistakes they couldn’t have known about beforehand. Or miss out on all kinds of really good stuff.

It’s the 21^st century. Start with online accounting software. You might want to get someone to set it up for you (the same as any kind of accounting process) but once it’s set up it does make life easier. Web based bookkeeping is straightforward, secure, backed up off site and you can add all kinds of extra “plugins” that can be added to it as you grow for all kinds of functionality to help you maximise income and save time and effort.

A good accountant will save you money – so it’s a good idea to use one. A bookkeeper is probably not necessary to start with but is something you should look into fairly early on. Time is money and wasting time on keeping track of incoming and outgoing money can drain your time like nothing else. Online bookkeeping is much easier than the old fashioned kind but it’s still hair pulling if you aren’t trained for it. And because you aren’t trained for it you will probably lose money, pay more tax and miss out on opportunities that could have helped out your bottom line.

A word of advice about this. Keep meticulous records from day one. Don’t say “I’ll do it later” because you won’t. At the very least it will make tax a nightmare. At worst it could get you into trouble.

Unless you are using your own name, you will have to register your business name. You need to have an ABN for this. Registering a business name does not mean you own that name. To have exclusive rights to a business name you will have to register it as a trade mark.

Also register the domain name for when you need a website (no matter what kind of business you are – you will need a website of some sort eventually). You can use it for your email address even before you have a website. mail@MeTheSoleTrader.com.au looks more professional, less fly by night and is a free plug for the business name for everyone who gets an email from you.

Not to toot our own horn, but a good bookkeeper and accountant can save you money, time and help stave off disaster.

So has all this put you off the whole concept? It shouldn’t. Most businesses in Australia, big and small, have started off as sole traders. Being a sole trader can be hard work but it can be very rewarding – not just in the monetary sense. So here is a final word of advice – give it a go!

Here is some resources that you might like to consult.

Business.gov.au have a page devoted to sole traders. They are also a really good resource for all kinds of help and information for small business. Find out more HERE.

They also have a page devoted to the difference between a company and a sole trader (including liability issues). Find out more HERE.

Here is some info on registering a business name including costs (also has some handy tips on deciding on a good business name). Find out more HERE.

You might also want to know what’s involved in registering a trade mark. Find out more HERE.

The ATO have a page about being a sole trader. Find out more HERE.

Add the Australian Taxation Office portal to your (free!) MyGov account. This is a simpler and easier way of dealing with the tax man compared to the Business Portal. Although the Business Portal has a lof more bells and whistles – you can lodge activity statements, register for some tax roles, handle Pay As You Go Instalments and more from MyGov. Check it out here: my.gov.au.

Find out more about the perils and pitfalls (and rewards) of being a sole trader. Give Wealthpath Accountants a free call on 1300 268 800