If you’re starting a new business or considering your current business structure, you may be unsure if you should operate as a sole trader or take the plunge and register as a company. In Australia there are four main types of business structures to choose from. Chat to us if you need help choosing the right one.
We’ve put together this comprehensive sole trader guide for you. Our goal is to help you navigate your way through all the questions. It’s got everything a sole trader needs to know. So, let’s get into it.
What is a sole trader?
Let’s start by answering the question, ‘What is a sole trader business?’
A sole trader is an individual running a business as a single owner. You control and manage the business in your personal capacity.
As a sole trader, you are legally responsible for all aspects of the business. This includes debts, and losses. These cannot be shared with other individuals.
You can employ workers in your business but you can’t employ yourself.
Essentially, you’re the captain of your own ship. You alone call the shots. But if your ship sinks or runs into any other ships, you’re responsible.
Some examples of sole traders include hairdressers, business consultants, freelance writers, and tradespeople – any one-person operated business, as the name suggests.
Sole trader advantages
There are a few key advantages to operating as a sole trader. This low-cost structure gives you full control of your assets and business decisions. You have fewer reporting requirements and you can use your individual tax file number (TFN) to lodge tax returns.
Sole trader disadvantages
Being a sole trader also comes with some clear disadvantages. The main one being that you have unlimited liability for debts. That means that there’s no legal distinction between private and business assets. Any business loss or claim against your business, can be extended to you personally.
This is a key reason why you should chat to us. We can help you structure your business and help you protect your family home and personal assets.
Another down-side is that as a sole trader you are responsible for making day-to-day business decisions. You won’t have the assistance of a partner. That’s another good reason to work with an accountant that offers you good business advice. Your capacity to raise capital is also limited as investors very rarely invest in sole proprietorships because there is no personal asset protection.
One area a lot of sole traders struggle with in their business is cash management. If you are interested in learning more cash management tips, speak to our team today.
Do sole traders pay tax?
Yes, sole traders are liable to pay tax. You don’t pay tax separately for your business activities though. Let’s break down some of the frequently asked questions about sole trader tax.
How to pay tax as a sole trader in Australia?
Operating as a sole trader in Australia, you are required to report all of your income in your individual tax return. Use the section for business items to show your business income and expenses. There is no separate business tax return for sole traders.
How much tax does a sole trader pay?
You will be liable to pay tax at the same income tax rate as that you pay as an individual taxpayer. Note that you may be eligible for some small business tax offsets. Chat to us for more info on that.
Do sole traders get a tax return?
If you operate your business as a sole trader, you must lodge a tax return, even if your income is below the tax-free threshold.
In your return you will need to report:
- your business income less the business deductions you can claim
- other income, such as salary and wages (from a payment summary or income statement), dividends, and rental income, less any deductions against this income.
You don’t have to work out the amount of tax you are liable to pay. The ATO will do this for you when you lodge. They will issue an assessment showing either the amount of tax owed to them, or your refund. If you have paid PAYG installments during the income year, the ATO will automatically credit these installments to you in your assessment.
What can I claim for as a sole trader?
As a sole trader you can claim tax deductions on expenses that are related to earning your assessable income. Here is a list of the most common items that sole traders can claim:
- Motor vehicle claims
- Home expense claims
- Phone and internet
- Uniforms
For a comprehensive look at these tax deductions, take a look at our Sole Trader Tax Guide.
How do I pay myself as a sole trader?
Sole traders are unfortunately not allowed to pay themselves a salary or wage as you are the owner of the business. However, sole traders can simply ‘pay’ themselves by withdrawing funds from the business. These are known as drawings. Those personal withdrawals are counted as profit and are taxed at the end of the year as part of your assessable income.
Can sole traders use personal bank accounts?
If you are operating as a sole trader, you don’t have to open a business bank account. BUT keeping your private and business transactions recorded separately will save you time and money. It will also help you manage your cash flow better. When it comes to preparing financial documents, activity statements, and tax returns it’s much easier to do when all your transactions are in a separate account.
Do I have to register as a sole trader?
You need to register a business name if you are a sole trader and you conduct business under a name other than your own personal name.
There are a few inexpensive steps to register as a sole trader:
- You would need to obtain an Australian Business Number (ABN) – free.
- Register a business name (if applicable).
- Establish a separate business bank account (optional) – bank fees may apply.
Do I need an ABN as a sole trader?
Unless your annual turnover is $75,000 or more, sole traders do not need to apply for an ABN or register for GST. However, there are many benefits to having one:
- To issue a tax invoice in Australia you need to include an ABN.
- You need an ABN to register a “.com.au” website domain.
- You can’t register a business name without an ABN.
- Having an ABN makes your sole trader business look more professional and legitimate.
Do I need an accountant as a sole trader?
You are not required to have an accountant but you are legally responsible for all financial aspects of the business. This includes any debts and losses and day-to-day business decisions. You’re also responsible for all tax obligations.
This is where the expertise of our accountants at Teamwork Accounting comes in handy. Besides just taking care of your bookkeeping and tax, we can help you with things like:
- Registering as a sole trader.
- Choosing the right business structure.
- Protecting your personal assets.
- Improving your cashflow.
- Minimising your tax.
- Reducing expenses.
- And maximising profits.
With Teamwork Accounting you have access to expert business advice and our many years of experience, working with sole traders in Point Cook, Werribee, Melbourne and surrounding areas. Chat to the team today!