As the simplest form of business structure to set up and relatively inexpensive to start and maintain, being a sole trader definitely has perks. But is it really right for your business?
After establishing the four main types of business structures available to run your business, it’s time to analyse the advantages and disadvantages of each. Consider these pros and cons of being a sole trader before making your final decision.
Simplicity: This is the key trait and advantage of being a sole trader and is one of the reasons this structure is the most common choice for those starting a business.
Full control: As a sole trader, you maintain full control of the business. As there is no need to discuss the dealings of the business with others, you can make decisions quickly and provide to the needs of the customers.
Business losses: The income of the business is treated as the person’s individual income; hence they are solely responsible for any tax payable by the business. If the business makes a loss, the tax losses may be offset against other sources of income from the taxpayer.
Easy to change: If you later decide to change the structure of your business to a company, it will be a lot less complicated than if you had begun as a company and want to change to a sole trader.
Free from payroll tax and workers compensation: As a sole trader, you are not considered an employee of your business and are free of any obligation to pay payroll tax and workers’ compensation on income you draw from the business (assuming you have no employees).
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Personal Liability: Personal property and assets of the sole trader may be vulnerable for debts and other business liabilities in the event that the business cannot pay back its creditors.
Little opportunity for tax planning: Sole traders are unable to split the business profits or losses with family members and are personally liable to pay business tax on all income derived.
Access to capital: Sole traders do not usually have access to large amounts of capital, which could mean larger bank loans.
Income tax profit: When your business starts to make a profit, the business income will be added to your employment income. This could mean that tax is paid at a higher marginal rate when the combined income is over a certain amount.
Superannuation contributions: A sole trader’s ability to claim a tax deduction for contributions to a superannuation fund is limited.
Read the next article in this series on strucuring your new business, which looks at the advantages and disadvantages of a partnership.
Did you choose a sole trader structure for your business? Was it the right decision?