One of the easiest ways to start your own business is by becoming a sole trader. It is by far, the simplest way to create and run a business and is relatively inexpensive to set up. While it may sound like a dream, there are also some disadvantages to being a sole trader. Let’s discuss the pros and cons, so you can decide what’s best for you.
What is a sole trader?
Generally speaking, a sole trader is a type of business structure, whereby the owner is entitled to all the profits after tax, but is also legally liable for any debts and losses. As a sole trader you remain in control of the business, but you can also employ staff to help you.
Pros of being a sole trader
As the easiest business structure to set up, being a sole trader has its perks. The first is the simplicity, which is perfect for first-time business owners or those setting up a side hustle. You have full control over your business decisions and you have far fewer reporting requirements, compared to a company or trust. The low set-up costs make it an easily accessible option for first-time business owners.
The Australian Taxation Office (ATO) allows sole traders to use their individual tax file number to lodge tax returns. You can also report all your income on your individual tax return by using the designated section for business items, instead of having to lodge two separate returns. Sole traders also pay the same income tax rates as individual taxpayers.
The main advantages of being a sole trader include:
- It’s easy and cost-effective to set up
- It’s a simple business structure that’s easy to manage
- The business owner remains in control
- The business owner is entitled to all profits
Cons of being a sole trader
While there are clearly some strong advantages to being a sole trader, there are also some disadvantages. One of the biggest consideration is that as a sole trader, you are legally responsible for all aspects of the business, which means you have unlimited liability, with even your personal assets at risk. You also cannot share debts and losses with other business partners.
Since you are not able to offer shares in the business, it can be hard to raise capital. If you need financing, you will most likely have to turn to traditional lenders, such as banks. And because all the day-to-day running of your business is your responsibility, it can be hard to take time off.
Looking to change from a sole trader to a company? Find out more here.