Becoming a sole trader is one of the easiest ways to start your own business, since it’s relatively inexpensive to set up and simple to operate. However, there are some traps it’s important to be aware of when you first decide to step out on your own.
Here, we’ll discuss the advantages of being a sole trader, the challenges you might face, and how you can set yourself up for success.
A sole trader is the simplest form of business structure – where you operate as an individual business owner with complete control over your enterprise. According to the Australian Bureau of Statistics, over a quarter of Australian businesses have fewer than five employees, with many being sole proprietors.
As a sole trader, you’ll have the benefit of keeping all post-tax profits – but you’ll be personally liable for all debts and losses. Your personal and business assets will be legally intertwined, making you personally liable for business obligations.
Below, we’ll explore the main advantages and disadvantages of the sole trader business structure.
The benefits of being a sole trader in Australia include minimal setup requirements, straightforward tax arrangements, and having complete control over business decisions. As a sole trader, you’ll be entitled to all profits after tax. You can also enjoy being your own boss.
Let’s look at the advantages of being a sole trader in more detail:
One of the key advantages of being a sole trader is the minimal setup requirements. Establishing your business requires registering for an Australian Business Number (ABN) and any necessary business names or licenses. The process typically involves minimal paperwork and can be completed quickly.
The Australian Taxation Office (ATO) allows sole traders to use their individual Tax File Number (TFN) to lodge tax returns. You can also report all of your income on your individual tax return, instead of having to lodge another return for your business. Sole traders also pay the same income tax rates as individual taxpayers.
Compared to other business structures, sole trading has minimal regulatory requirements and paperwork. This simplicity extends to financial management – you can easily maintain your own books using software like QuickBooks Online and handle banking independently, without consulting partners or shareholders.
In general, many self-employed people find that the disadvantages of a sole trader setup are outweighed by the simplicity of day-to-day management.
When considering the advantages and disadvantages of being a sole trader, control is a significant benefit. As the sole decision maker, you’ll have complete freedom to set direction, implement strategies, and respond to market opportunities without seeking approval.
This autonomy extends from daily operations to long-term planning. You’ll choose your working hours, select clients, and determine what services you’ll offer.
Sole traders have the exclusive right to all business profits. After meeting tax obligations, every dollar earned will belong to you, without having to share with partners or shareholders. You’ll have complete control over how to use the profits – whether reinvesting in the business or taking as personal income.
When evaluating the advantages and disadvantages of sole trader structures, it's important to seriously think about the challenges you might face. These include working alone, managing all of your clients, and being personally responsible for all business debts and losses.
Here, we’ll look at the main disadvantages for sole trader businesses, and offer some solutions.
Self-discipline is crucial when running a successful sole trader business. You’ll need to manage your time effectively to avoid both underworking and burnout. Some people work well in a self-directed role, while others need external help to manage their activities.
Here are some ways that successful sole traders maintain their discipline:
Unlike larger businesses with dedicated account managers, a sole trader personally handles every client interaction – from pitching and negotiating, to managing expectations and resolving conflicts. For this reason, a significant disadvantage of being a sole trader is having to manage multiple client relationships while also getting work done.
Without a team to share the load, you’ll have to maintain professional relationships while protecting your time and energy.
Here are some tips for maintaining balance:
Challenges and disadvantages for sole trader businesses often centre around finances. As a sole trader, you’ll be personally responsible for all financial aspects of the business and will hold unlimited liability. This means your personal assets – such as your home or savings – will be at risk if the business incurs debts or legal claims.
With no business partners to share the workload, you’ll need to juggle roles like owner, accountant, and marketer. This multitasking can be overwhelming and essentials like cash flow management can slip through the cracks.
To mitigate these risks, you can:
Looking to change from a sole trader to a company? Find out more here.
When weighing up the advantages and disadvantages of a sole trader business structure, it might be worthwhile to seek guidance from a professional accountant or financial advisor. They will be able to help you plan ahead and prepare for any upcoming challenges.
Here are 6 tips for success as a sole trader:
Although it’s not legally required, operating your sole trader business from a separate bank account will make record keeping much easier. It also enables seamless integration with accounting software like QuickBooks Online, and helps to maintain clear financial boundaries between personal and business transactions.
Understand the difference between cash flow and profit. Many businesses can operate short term at a loss, but they can’t operate without cash. Ideally, you should establish a working capital balance that can cover short term expenses when revenue is lower than expected.
Even though you won’t be an employee of your business, it will help if you pay yourself a set ‘wage’ each week rather than taking cash on an ad hoc basis. This’ll also help with cash flow management and forecasting.
Keep in touch with a wide circle of contacts and networks. These may be other sole traders from similar industries or businesses from around your physical location. You can call on these contacts and peers for support when you face various challenges in your business.
Being a sole trader means you’ll be personally liable for business debts. For this reason, it’s very important to have appropriate insurance. It can be a good idea to speak to an expert about whether you need professional indemnity, business, or public liability insurance.
Retirement planning is a crucial yet often overlooked aspect running a sole trader business. Establish a consistent superannuation contribution strategy to secure your future. Remember, contributions up to $25,000 are tax-deductible.
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