Starting your first small business will be an exciting – and terrifying – journey, and you will quickly learn a lot.
It’s a good idea to research as much as possible to get a handle on what’s in store.
What structure you choose to underpin your business is an essential question you will need to answer early on in your business journey.
Most of the conversation will be about whether you want to begin your business under a sole trader structure.
When making that decision, it is crucial to assess whether the structure suits your current circumstances and if it will support your long-term business goals.
This article will help you decide by outlining the advantages and disadvantages of being a sole trader.
What is a sole trader?
Essentially, a sole trader is a small business run by one individual. Under the law, you and the business are recognised as one entity. This is unlike other business structures where the business itself is a separate entity from the person running it.
This distinction brings both its advantages and disadvantages for the small business owner.
Pro: Sole traders are personally responsible for profits
Being a sole trader means you have total management and ownership of the business. You can run your business as you please without interference from other business partners.
Since it’s your skin in the game, you can reap the benefits of your hard work and oversee the distribution of any profits.
Also, if you decide to sell the business, you can keep all profits and any money you have earned after taxes.
Con: Sole traders are personally responsible for debts
For those just starting, the alure of control can be appealing to operate as a sole trader. However, it is important to remember the drawbacks of being a sole trader.
Again, as a sole trader, you are financially and legally responsible for the entire business. If there is any debt or liability, it puts your personal assets at risk. That means you don’t have the option of sharing losses and debts with other business partners or declaring bankruptcy if it all goes south.
You and everything personal asset you own are tied to your business because, in essence, you are the business.
Having no legal distinction between yourself and your business will also affect the risks you face.
From a customer slipping over in a store to offering lousy advice, nearly all small businesses face some sort of risk that could result in a claim being made against you.
These claims can be costly. As a sole trader, you will be responsible for paying for any damages or legal costs involved in responding to a claim.
Pro: There are many safeguards available for the risks you face
Fortunately, there are many types of sole trader insurance that are designed to protect you and your business from the risks you face.
For example, Public Liability insurance* is an essential type of insurance for sole traders in Australia.
It is designed to provide protection for you and your business in the event a third party brings a claim against you due to their being injured or sustaining property damage as a result of your negligent business activities.
Public Liability Australia has a host of sole trade insurance options designed to protect you financially from a variety of risks.
Check them out here, and you can be covered in minutes.
Con: You may find yourself restricted in various ways
Being a sole trader means that you’ll be your own boss. The decision-making process is streamlined, as there is only one person running the show.
Consequently, you may miss the ability to share ideas and concerns that you usually can do when running a business with others. Likewise, when attempting to grow and raise capital for your business, you cannot offer a share of your business to investors. Instead, you will likely need to seek financing from lenders such as banks, which charge interest.
Another important consideration is that there is no flexibility when planning your tax. This is because all business income is treated the same as your personal income. Accordingly, the more revenue your business makes, the more your tax liability increases. Unfortunately, you cannot access flat tax rates like those enjoyed by companies.
Pro: It’s easy to set up a sole trader business
In Australia, setting up a sole trader business is a relatively cheap and straightforward process. Besides any industry-specific licenses or regulations, sole traders will generally need three things:
- Australian Business Number (ABN) – aunique number identifying your business
- Tax File Number (TFN) – you need an individual TFN rather than a business TFN
- Register for GST – You may need to register for some taxes depending on how much you earn
On the other hand, registering your business as a company generally requires more registration fees, annual reviews, and more stringent tax regulations. To find out more about how to register your business as a sole trader, click here.
The bottom line
There are many pros and cons of being a sole trader. Starting a business can be difficult and answering the question of what business structure to choose involves a lot of research. This decision will form the basis of your business for years to come, so it’s important to get it right.
It’s always best practice to consider the advice of a professional to guide you through this process. But hopefully, this article can help you weigh the disadvantages and advantages of being a sole trader.
Once you have all the information, you can decide whether it’s the right choice for your new business venture.
This information is general only and does not take into account your objectives, financial situation or needs. It should not be relied upon as advice. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording.© 2022 BizCover Pty Limited, Public Liability Australia is a business name of BizCover Pty Ltd (ABN 68 127 707 975; AFSL 501769)