What is a Sole Trader?

A sole trader is a type of business structure in Australia owned and operated by an individual. The individual is responsible for all aspects of the sole trader business, bearing all the risk and responsibility for the business. This includes paying tax, being responsible for liabilities and managing risk.   

The individual may register a business name, however that business name is just a front for the business, which is still owned by the individual. An individual operating as a sole trader simply uses their own Tax File Number and any profits made in the sole trader business are assessable to that individual at their marginal tax rate.  

In a sole trader business, it is common for the sole trader business to have an ABN, employees, be registered for GST and be trading as a normal business.  

A sole trader business is common for small businesses, as it is quick to establish, easy to understand and low cost to operate. It is often the first structure for someone going into business.  

Advantages and Disadvantages of a Sole Trader Business

Advantages of a Sole Trader Business

Operating as a sole trader business in Australia can have several advantages: 

Ease of establishing a Sole Trader Business

Setting up a Sole Trader business is relatively simple. The individual simply uses their tax file number and from this and their personal information, establishes an ABN. Typically, this is a quick and inexpensive way to establish a business structure.  

Ease of Understanding a Sole Trader Business

A sole trader business structure is easy to understand. Not just for the individual in question but for banks and other organisations. The sole trader business structure is simply an extension of the individual.  

Sole Trader Business Taxation Simplification

The tax calculation for a sole trader business is relatively simple. Whatever the profits of the sole trader business, this profit is assessable income for the individual at their marginal tax rates. There does come a point in time (when profits are too high) when a sole trader business structure may no longer be the best business structure.  

Low Operating Costs of Sole Trader Business

The cost to establish and operate a sole trader business structure is low. This is because there is no other entity to consider or account for, it is simply the individual. There is no need for legal documents, governance or additional accounting costs of lodging separate tax returns.  

Easy Dissolution of a Sole Trader Business

It is easy to wind down a sole trader business structure, in fact, it is the easiest business structure to wind down.  

Individual of a Sole Trader Business has Complete Control

You’re the boss. An individual of a sole trader business has complete control of the business. There are no partners or shareholders of other people to consider. This business structure does allow for quick decision making.  

Disadvantages of a Sole Trader Business

Operating as a sole trader business in Australia come with several potential disadvantages: 

Unlimited liability

As a sole trader, you are personally liability for all debts, obligations and any litigation action. There is no separation between you, your personal assets or the business enterprise. A sole trader structure provides the most personal risk exposure to failure.  

Potential for high tax rates

Sole trader businesses are simply taxed at marginal tax rates. Meaning if the sole trader business earns a profit of more than $190,000, then you will be paying top marginal tax rates of 45% + 2% for medicare. Compared to a company that is a base rate entity, with a tax rate of 25%.  

Limited Investment

Often difficult to raise money from banks or investors, as they really have nothing to secure their investment or loan against.  

Difficult to step away

Typically sole traders are sole operators and have difficulty stepping away for a holiday or a break. It is difficult to have multiple employees with a corporate structure that has robust processes and systems, as per mentioned above, bank finance or capital investment is difficult to obtain and businesses of some size often need working capital to grow.  

Limited growth potential

It can be difficult to grow a sole trader business, as of access to cash / capital. Sometimes it can be better to team up with someone else to grow the business quicker, which could be as a partnership or in a company or other like structure.  

Lacks Credibility

Being a sole trader can lack credibility and can limit the work you can do or the contracts you can win. Many jobs or contracts require a business entity and some businesses won’t deal with a sole trader.