I have twice previously sought advice on starting a business – in the UK and Perth. Neither experience was great and they certainly didn’t answer my questions. I have just returned from an advisory session at the SBDC and need to express my huge gratitude; their advice was invaluable. I would not hesitate to recommend them to anyone starting a business.Jude Daly - Pareto Law Australia, Bibra Lake
A sole trader is the simplest form of business structure and is relatively easy and inexpensive to set up. As a sole trader you will be legally responsible for all aspects of the business. You’ll generally make all the decisions about starting and running your business and you can employ people.
Advantages of being a sole trader
- Simple to set up and operate.
- You retain complete control of your assets and business decisions.
- Fewer reporting requirements.
- Any losses incurred by your business activities may be offset against other income, such as your investment income or wages (subject to certain conditions).
- Allows you to use your individual tax file number (TFN) to lodge tax returns.
- You are not considered an employee of your own business and therefore don’t pay payroll tax, superannuation or workers’ compensation on income you draw from the business.
- Relatively easy to change business structure if your business grows or if you wish to wind things up.
Disadvantages of being a sole trader
- Unlimited liability which means all your personal assets are at risk if things go wrong.
- Little opportunity for tax planning – you can’t split business profits or losses with family members and you are personally liable to pay tax on all the income from the business.
Other factors to consider
You don’t have to register a business name if you use your own name. If you choose not to use your own name you will need to register a business name with the Australian Securities and Investments Commission.
TIP: Before choosing a business name check its availability as a trademark, business name and domain name (your website address). If the name is already registered by someone else as a trademark in Australia, in a class relevant to your business you’d be wise to choose another name. If you register the name as a trademark in relevant classes, this may give you exclusive rights to that name in those classes. Registering only as a business name, company name or domain name doesn’t give you the same type of exclusive rights
Sole traders declare their business income (or loss) as part of their personal income tax return and are taxed at the same rate as an individual.
You will need to register your business for goods and services tax (GST) if your annual turnover is expected to be more than $75,000.
Once the Australian Taxation Office (ATO) has received your income tax return you will be advised if you need to start paying pay-as-you-go (PAYG) instalments. The instalments are a pre-payment of your tax for the following financial year and you will be credited with these instalments on your next income tax assessment.
Until you are required to start PAYG instalments consider putting money aside, or making voluntary ATO payments, to budget for any future tax payments.
Visit the ATO website for more information regarding tax obligations for sole traders.
Personal services income (PSI)
PSI is income from your skills or efforts as an individual. You earn PSI when more than 50 per cent of the income you receive from a contract is for your skills, knowledge or efforts. Find out if PSI applies do you.
A sole trader is responsible for the liabilities of the business. Liability is unlimited and includes all personal assets, including any assets jointly-owned with another person, such as a house.
You are also not covered by workers’ compensation should you injure yourself at work. This may result in a loss of income if you cannot work and you may still be required to pay any expenses for your business, such as loan repayments.
Learn more about the various insurances available for your business.