In some cases, if you wish to start your own business, setting up a legal entity as a sole trader will be your best option. In this article, we take a look at the benefits and drawbacks of going it alone.
The first step in starting your own business is selecting how you want to structure it. The simplest solution for many organizations is to start off as a sole proprietorship. However, before you begin, you should think about the pros and drawbacks of operating a business in this manner in Australia.
This article includes an analysis of the most popular alternatives as well as the benefits and drawbacks of operating as a sole trader.
Why Run a Sole Trader Business?
It can be very quick and easy to start a business as a sole trader. The business is you; you are one and the same entity. The costs of starting a sole proprietorship are very low, and there are not many requirements in terms of legal documentation. A further advantage of establishing a sole tradership is that it involvesless tax paperwork.
As sole proprietors, people run their enterprises independently, owning and controlling every aspect of their business and engaging in sole commerce. Due to the absence of possible conflict with business partners or shareholders, they benefit from the greatest operational independence.
Additionally, those who operate their businesses in this fashion preserve all after-tax earnings as well as any gains that may result from the sale of the company
Getting Started as a Sole Trader
A sole proprietorship can be established quite easily. Simply establish your company with an Australian business number (ABN). Traders who establish a lone trading enterprise with a TFN do business under their own name. It is preferable to register your sole proprietorship for GST if you anticipate making more than $75,000 in one fiscal year.
It’s significant to remember that a sole trader’s business revenues are recognized as personal income. This implies that sole traders must appropriately declare their business’s net income after expenses and pay income tax using their personal TFN. The same income tax regulations apply to sole proprietors as they do to everyone else.
If a sole proprietor is an Australian resident, they are also eligible for the tax-free threshold.
People who run a business in this fashion are in charge of making their own superannuation arrangements. You must make superannuation contributions for qualified employees if you employ people. You may be eligible to claim a tax reduction if you plan your own retirement contributions.
What Drawbacks Come with Operating as a Sole Trader?
While starting a firm as a sole proprietor may be less expensive than other business models, there are a number of things to consider. There are several drawbacks that these enterprises must contend with, such as:
- Legal accountability for a sole proprietor’s entire business, including all financial aspects, extends to them. In the event of obligation, debt or accident, your personal assets could be in danger. It is for this reason, sole traders are advised to put sole trader insurance in place.
- Shares in a sole proprietor’s company cannot be sold to raise money. Instead, if you have a cash flow problem or need cash injections, you might need to raise money through financing provided by lenders.
- Selling a sole proprietorship is a difficult procedure.
- A lone proprietorship cannot share its debts or losses with other businesses.
- Working together to run a firm with others frequently results in benefits that sole traders are unable to enjoy.
What Alternatives Exist to Operating as a Sole Trader?
Alternatives to establishing a firm as a sole proprietor includeforming a corporation or establishing a partnership.
In Australia, forming a business is challenging. Companies are distinct legal entities from business owners and are governed by ASIC. Business owners who do this benefit from increased financial security and reduced risk.
By forming a partnership, all partners can equally share in a company’s debts, profits, and losses while also jointly owning a portion of the company.
