A sole proprietor, or a sole trader, is someone who operates their own business and is the only owner. Unlike a person who is part of a partnership or owns a registered company, there’s no distinction between a sole proprietor and their business.
Whether you’re at the start of your self-employed journey and exploring your options, or you’ve been looking at a sole proprietorship for a while, this article will help you learn more about what you can expect.
A sole proprietorship is a common form of business structure here in Australia, with over 750,000 total sole traders in operation. Under this model, an owner operates the business as a single entity. There’s no legal distinction between the business and the owner, and they have complete control over all aspects of the business.
When you operate a sole proprietorship, it's important to understand that there is unlimited liability. This means that as the owner, you are personally accountable for all the debts and obligations of your business. If your business faces financial challenges, your personal assets might need to be used to fulfil those obligations.
So, let’s go through the main characteristics of being a sole trader:
Establishing a sole proprietorship is a relatively simple process. It usually involves registering the business, getting an Australian Business Number (ABN) and applying for any necessary licences to ensure you’re compliant with specific regulations for your industry.
For tax purposes, the income from your business will be treated as your personal income. As a sole proprietor, you’ll report your business income and deductions on your personal tax returns. This makes the taxation process less complicated compared to other business structures.
For more information have a look at our guide to tax returns for sole traders.
Sole proprietors have a great deal of flexibility and independence when it comes to decision-making. The owner takes responsibility for all aspects of the business, which can be a blessing - or a curse.
Since there is no legal separation between the business and its owner, personal assets could be at risk if there are any losses or liabilities in the business. When you’re considering sole proprietorship, you need to consider carefully whether the risks are worth it.
As an individual running a business in Australia, you have certain tax responsibilities that you need to fulfil. Let’s break down the main tax obligations for sole traders in Australia:
Include all sources of income, including income from your business, when filing your individual tax return. You can provide details about your business income and expenses in the business items section. Unlike other types of businesses, sole traders don't have a separate tax return specifically for their business.
If your annual GST turnover reaches $75,000 or more, you must register for Goods and Services Tax (GST). Additionally, registration is mandatory if you offer taxi, limousine or ride-sourcing services, regardless of your GST turnover. Once registered for GST, you should charge GST on taxable sales and can claim input tax credits for any GST paid on business expenses.
If you're registered for GST, have Pay As You Go (PAYG) withholding obligations or make PAYG instalments, you might need to submit Business Activity Statements (BAS). BAS reports important information about your business income, expenses and taxes.
Remember to pay taxes on all your income, including what you earn from your sole trader business. Your individual tax rate determines the amount you owe.
For more information have a look at our beginners guide to beginners guide to income tax.
When filing your tax return, remember that you can claim deductions for salary, wages and allowances paid to your workers. However, keep in mind that personal expenses or assets taken from the business for personal use are not deductible.
For more information have a look at our guide to tax deductions.
By notifying your fund and making personal super contributions, you may be eligible to claim a deduction. This offers an opportunity to save for retirement with potential tax benefits.
As an employer, it is essential to fulfil all your obligations, which include deducting PAYG (Pay As You Go) taxes and making superannuation contributions for your employees.
Registering as a sole trader is relatively easy, once you have your idea and business name, you can sign up for an ABN and start trading. Here are the steps you should take:
You will need an ABN for your sole proprietorship. You can apply for an ABN online through the Australian Business Register (ABR) website. Having an ABN is essential for business activities, including invoicing and dealing with other businesses.
If your business operates under a name other than your personal name, you must register the business name with the Australian Securities and Investments Commission (ASIC). You can do this through the ASIC Connect website.
Setting up a sole proprietorship is simple and cost-effective. Unlike other business structures, there are no complicated legal requirements or extensive paperwork to deal with, which will help you keep your set-up costs low.
Perhaps the main advantage of being a sole owner is having complete control over every aspect of your business. From decision-making to operational strategies and the overall direction of the company, you have the freedom to act swiftly and adapt to market changes as and when they happen.
Being a sole proprietor also gives you far more flexibility. You can easily adjust your business strategies in response to market trends without seeking approval from partners or shareholders. You can make quick decisions and can seize opportunities as they arise.
As a sole proprietor, you’ll be responsible for filing your own taxes and running all the financial aspects of your business. If you’re feeling overwhelmed by your operational tasks, consider signing up for QuickBooks Self-Employed. This accounting software can help you streamline your accounting and bookkeeping, from sending invoices to helping you with your taxes.
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