Sole Trader

What is a sole trader?

A sole trader is a single person operating a business under their own name, e.g. James Smith, or with a registered business name, such as 'Smith Exporting'.

A sole trader is a simple business structure, giving the owner all the decision making flexibility as well as managing the financial and as your business develops, it is possible to register as a company with ease.

Often a small business will start out as a sole trader, and later, when the business develops, register as a company.

Advantages

The easiest method of starting a business is to operate as a sole trader.  This way the proprietor makes all the decisions for the business and deals with all the financial matters. Other advantages include:

• establishment fees are low - contact Consumer Affairs Victoria for the current rate
• simple business structure and documentation
• the sole trader maintains full control over business decisions
• the sole trader enjoys all profits and capital
• it is easy to wind up this type of business
• taxation advantages exist when profits are low
• other than the Income Tax Assessment Act and contract law, no specific legislation applies

Disadvantages

Although operating a business as a sole trader provides greater freedom and autonomy, this business structure can also present risks to your personal finances.  Operating as a sole trader has one important disadvantage and that is that the operator's liability is unlimited.  If a problem arises, creditors of the business are able to make you totally responsible for all debts.  This affects your personal assets and in a worst case scenario will send you bankrupt. Other disadvantages include:

• your capital will be limited by your personal assets
• the sole trader's expertise may be limited, and there is no one else to share the workload
• the sole trader is subject to unlimited legal liability
• it can be difficult for the sole trader to take time off
• responsibilities can cut into family and holiday time
• there is no one to operate the business when the sole trader is ill
• the sole trader is personally responsibility for all debts and liabilities
• it may be difficult to pass on ownership, making the business hard to sell if the proprietor dies or experiences a change in circumstances
• taxation disadvantages exist when profits are high

Business registration

In the example above, James Smith is not required to register his exact name as a business name, though he may choose to.  If he is trading under any variation of his name, e.g. 'James Smith and Associates', or as 'Smith Exporting', legislation requires him to register the business name with Consumer Affairs Victoria.

Tax obligations

As a sole trader, you are required to include a declaration of income earned from the business as a part of your personal tax return.  Sole traders pay income tax at personal tax rates, though they may also be liable to pay provisional tax.

Liability

As a sole trader, you own the assets of your business and are responsible for its liabilities.  Liability is unlimited and can extend to your personal assets, including your share of any assets that you jointly own with another person.