A sole trader (also known as a sole proprietor or sole proprietorship) is an unincorporated business structure, and one of the simplest ways to start a business. In a sole proprietorship, one individual runs and owns the entire company. They typically have full control of how the business is run and sole autonomy when it comes to building the company’s brand.
A sole trader keeps all of the company’s profits after tax has been paid on them, rather than having to share profits with a partner. They also accept sole liability for paying tax on their profits. If a sole trader in Australia earns above $75,000, they must register for GST.
A sole trader is often the only person who works for the business they have created. However, a sole trader can still have employees. If they do so, sole traders must meet their obligations to pay workers’ compensation insurance and superannuation contributions. People may become sole traders alongside full or part-time employment as long as all profits are reported to the ATO. As a sole proprietorship grows, it may be advantageous to restructure as a limited liability company in line with the company’s expansion.
Sole trader examples
Many smaller retailers are set up as sole proprietorships. Common examples include:
These include construction workers, gardeners, landscapers and hairdressers.
Freelancers working in the digital and creative industries are often also sole traders. These include graphic designers, web designers and developers, copywriters, marketers and social media specialists.
Gig economy workers
Those who work in the gig economy are also typically sole traders, whether they manage their business alongside a day job or commit to it full time. This includes taxi drivers, couriers, delivery drivers and tutors.
Pros and cons of setting your business up as a sole trader
Sole proprietorships are advantageous because they are easy to set up and dismantle. Taxes are often simpler to calculate for these business structures than they are for partnerships or incorporated companies. Sole traders in Australia, for instance, can use their own Tax File Number to pay taxes rather than needing an employer identification number.
Australian sole traders need only report their income and expenditure via a relatively simple self-assessment, paying income tax on their profits. Furthermore, the business owner is entitled to all of the profits the company makes after tax. However, as they are not incorporated, they lack the liability protections extended to incorporated companies.
- quick and easy to set up
- easier tax administration
- lower costs
- sole traders have unlimited liability
- can be harder to raise business capital as a sole trader
- fewer tax planning opportunities as tax is paid on income in the same year it is earned
Frequently asked questions about sole traders
How do sole traders pay their taxes?
Sole traders in Australia submit a Self-Assessment tax returns every year and pay tax on all of their profits above the tax-free threshold for that year.
How do I switch from sole proprietorship to a limited company?
If you’re currently operating as a sole trader and want to step things up by registering as a company, you can do so by following a few steps. You’ll first need to consider whether a company structure is right for your business, and get an understanding of the responsibilities and reporting requirements involved. Alternatively, you could choose to register as a company from the beginning and skip the sole proprietorship step altogether.
This article is for informational purposes only and does not constitute legal, employment, tax or professional advice. For specific advice applicable to your business, please contact a professional.