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What is a sole trader business? Put simply, a self-employed individual who owns and operates their business. They are legally responsible for every aspect of the business, which includes losses and debts. Under the sole trader business structure in Australia, the individual can hire employees. Often, tradespeople and freelancers operate under this business structure.
The differences between a sole trader and a company
What are the differences between a company and a sole trader? They have different obligations on several fronts. A sole trader is a single entity, which means that you share a single ABN (Australian Business Number) and TFN, Tax File Number.
As a sole trader, you are your business. If your business is in debt, suffers a loss, or is sued, you are liable as a single entity. On the other hand an established company is a separate entity, so debt, loss, and legal issues remain within the company. If the company is sued, your personal finances won’t be touched. It’s the company’s assets that would be on the line. You can generally tell the difference between the two by the business name. For example, a sole trader may operate under a name like Jack Williams’ Electrical Services rather than a registered company that operates as Jack Williams’ Electrical Services Pty LTD.
There are fewer costs involved with setting up as a sole trader. While neither business has to pay to receive their ABN, there is a fee to register a business name, and you may have bank fees if you elect to set up a business account.
As a sole trader you won’t need to file a separate tax return, but you do need to keep your records (and tax returns) for five years. If you make changes to your business, you have 28 days to notify the government.
Likewise, a company must also keep tax returns for five years, financial records for seven, and file a separate tax return on behalf of the business. The money earned by a sole trader is considered individual income. You can withdraw it from your business account and claim deductions for the cost of running your business, but you’re responsible for paying tax. Worker’s compensation does not cover sole traders. So, it’s important to purchase the correct insurance if you are operating as a sole trader
Advantages of becoming a sole trader
It is easier and cheaper to set up as a sole trader. The structure of the business is less complex and easier to understand.
There is a single set of accounting fees and tax returns to deal with.
For low-income generating sole traders, there are potential tax benefits.
If you don’t employ additional staff, you do not need worker’s compensation insurance.
You are not required to make superannuation contributions (unless you have employees).
Disadvantages of becoming a sole trader
There is more personal risk as a sole trader. Your personal assets are on the line if you run into problems.
Income splitting is a popular potential tax strategy but not one appropriate for sole traders.
In the event of a divorce or death, there are complicated tax implications.
There isn’t as much flexibility when it comes to tax planning.
The business will end when the sole trader retires or dies.
How to register as a sole trader
Now that you know what a sole trader is, and the differences between a sole trader and a company’, you can learn how to become a sole trader. Firstly, you need to decide whether you want to use a business name other than your own. You will need to check whether your chosen name infringes on an existing business or trademark. Assuming it doesn’t, you can register your business name with the government and apply for the relevant licences, registrations, and insurance. You will need your ABN before you can register your business name. Remember, you don’t need to register the name of your business if you trade in your own name.
Licences & registrations for a sole trader
Registering the business
The first step is registering your business name. This is only necessary if you plan to use a trading name other than your personal name. You will have to trademark the business name if you want total ownership and legal protection over it.
The good news is your tax file number is the same as your existing tax file number. You simply continue using it as you always have when you file your tax return.
Without an Australian Business Number, your clients cannot pay you properly. Legally speaking, if you do not have an ABN, then they need to withhold 47% of their payment for tax purposes. If you collect GST (goods and services tax) an ABN is compulsory. When you apply for your ABN, it will ask if you want to register as a sole trader.
Goods & services tax
If your current (or expected) turnover is or exceeds $75,000, you need to register for goods and services tax.
Additional permits & licences
Sole trader requirements vary from state to state; check with the Australian Business Licence and Information Service to find out what other registrations are necessary in your state..
Top 5 tips for sole traders
There are tax breaks and incentives available for sole traders, and to avoid losing income, you should make yourself aware of them. For example, a superannuation contribution is a tax deduction, when you make voluntary contributions, you can deduct those from your end of year income. So, while you aren’t required to pay your super from your drawings, there is a benefit to doing so. Additionally, you pay the individual tax rate, which means you may also be eligible for a small business tax offset. This allows you to reduce your tax payment by up to $1,000 annually. While your income as a sole trader is considered your primary income, having a business account does make things less confusing. It allows you to save for those non-negotiable expenses like GST, PAYG, and employee super contributions.
Build a business website
A website is important for all businesses, but especially sole traders. You’re only one person so, using contact forms on your website can help you manage queries, strong website will help you build trust and attract new customers. Square Online has the tools you need to get started.
Maintain tidy records
Your accounting needs to reflect the fact that you are operating a business by recording and tracking your income and expenses. It’s an important part of operating a healthy business and will keep you out of trouble. It will also make tax time a much smoother process if you remain organised year-round.
Know your limits
You need to know how much you can earn without paying taxes and before you pay GST. There are thresholds and limits, the more you know, the more efficiently you can operate your business. If you use your home as your office, you can deduct a portion of your phone, internet, and power costs. The same goes for your personal vehicle and maintaining your tools and equipment. The safest way to operate is to seek advice from a registered accountant to ensure you stay above board.
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