What is a Sole Trader?

So, you want to be a sole trader? Or you’re curious about what it means. Well, you’ve come to the right place.

Put simply, a sole trader is a self-employed person who runs a business that typically consists of them, however they can employ others to help run their business.

When you want to start your own business, you will probably ask yourself should I be a sole trader or a company and what is the difference?

Well, the defining factor is that they are different business structures.

The key difference is that a sole trader and their business are the same entity, sharing the same Tax File Number (TFN) and Australian Business Number (ABN).

A company on the other hand, is treated as a separate entity to the owner with its own TFN and ABN.

There are sole traders across many industries.

You probably have come across one, or even hired one at some point, whether it be a landscaper, electrician, plumber, bookkeeper, caterer or tutor.

What are the Advantages of Being a Sole Trader?

Well, there’s quite a few so let’s list them:

You can be your own boss
You can pick and choose your own clients
It’s relatively quick to set up
It’s the simplest and cheapest business structure to set up
As the sole owner, you control and manage the business the way you want to
The money you earn belongs to you, not a company
You can use your own Tax File Number (TFN) to lodge tax returns as opposed to a separate TFN that is required for other business structures
You can employ others
You only need to keep financial records for at least 5 years

What are the Disadvantages of Being a Sole Trader?

Weighing up the risks of any undertaking is important, so here are some sole trader drawbacks to consider:

You are legally responsible for all aspects of your business, including any debts or losses
Liability is unlimited, so all your personal assets are at risk if things go wrong, as opposed to a company structure where the company’s assets would usually be at risk and not your own
You will most likely need to get insurance to offset your risks, which can be expensive
You are responsible for paying your employees’ super as well as your own
You are personally liable to pay tax on all income
No paid leave or sick pay
If your home doubles up as your workplace where you meet clients, you may find there’s a lack of privacy.

Does a Sole Trader Need an ABN?

Yes, sole traders are required to get an Australian Business Number.

An ABN is a unique combination of 11 digits designed to make it easier for the Australian Taxation Office (ATO) to identify businesses.

An ABN is compulsory if you are running an enterprise or business (not a hobby) regardless of annual revenue.

It is compulsory to register for GST if your annual turnover is $75,000 or more (including GST) and you need an ABN to register for GST.

Should You Be a Sole Trader?

Good question. The answer is really up to you.

It’s a personal choice. You may want to talk to an accountant to help work out your best option, as this article is a general guide only.

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