Sole Trader

Overview

A sole trader is the simplest business models. It is generally advised for individuals going into business where there is no real risk involved as, unlike other forms of business models, there is no separation between the owner and the business entity. This means that the owner is liable for any debts the business incurs. However, the business owner is also the sole repository for the profits of the business. There is minimal government regulation surrounding this business model, making it an ideal model for those who value simplicity in their workplace.

The sole trader

The sole trader is the only key individual in this kind of business structure. The business is carried in their name and they are answerable only to themselves. The sole trader can employ others but these additional employees do not play a key role in the business setup.

Requirements to Establish a Sole Trader Business

There are no formal requirements to establish a business as a sole trader, which is one of the reason why it is favoured among new businesses.

Laws pertaining to the business field

Individuals participating in the business will need to follow laws relating to their business field. For example, an electrician carrying on a business will need to be licensed. It is important that before starting any business, the founders are aware of these stipulations to avoid disputes later.

Business name

If the business is being carried on under any name other than that of the full name of its founders, then the name needs to be registered with ASIC. This is a simple process but still required in Australia.

Tax File Number (TFN)

An Australian Tax File Number (TFN) is a personal reference number for taxation purposes. While a TFN is not required for personal use, but the tax fees are substantially higher without one. Furthermore, without a TFN it becomes impossible to obtain an Australian Business Number.

Australian Business Number (ABN)

Every business after July 2000 is required to have an Australian Business Number (ABN), which can be attained through the Australian Taxation Office (ATO). Find an ABN Application form here

Register for Good and Service Tax (GST)

If the business has a GST turnover of $75,000 or more a year in income, the they are required to register their business for GST.

Example Scenarios of Sole Trader

Example 1:

Brian is thinking of setting up a business working as a cleaning contractor. This business will take place after he has finished his other job and will earn him a total of $20,000 a year. Brian may want to set up this business as a sole trader. There is no need to register for GST as he is not earning over the $75,000 requirement and there is little chance he will need to expand the business as it is in addition to his other income. Furthermore, there is little chance that Brian will need some form of asset protection as there are minimal risks inherent in this business as well as limited rewards from carrying it on.

Example 2:

Helena is planning on starting a business as a contractor for a construction company. She will operate using her own tools and will earn $80,000 a year for her efforts. Helena does not intend to employ other people in her business. It might be a good idea for Helena to establish this business as a sole trader. While she will have to register for GST as she is earning over $75,000 a year, she can minimise the risks inherent in her business by not employing other people. This enables Helena to protect herself without asset protection and still gain all the rewards from her business.