What is a sole trader? A guide for budding business owners

Updated: Sep 4, 2021

Are you itching to turn your great business idea into a living? Or maybe it’s time your side-hustle took centre stage in your career?

If you’re ready to be your own boss, there are a number of ways you can go about it. In Australia, the most popular choice for self-employed people is to become sole traders.

Being a sole trader in Australia means more than working for yourself. It’s a legal business structure.

So, before you register your business, you should understand the real meaning of sole trader and if it’s going to best suit your situation, needs and business goals.

In this article, we’ll equip you with answers to some big questions on the minds of up-and-coming small business owners, such as:

  • What exactly is a sole trader?

  • What are the advantages of being a sole trader?

  • What are the disadvantages of being a sole trader?

  • How does being a sole trading affect my tax?

  • Do sole traders need to charge GST?

  • Should I choose a sole trader or partnership structure?

  • How do I get started as a sole trader?


Sole trader definition – what exactly does it mean?

A sole trader means one person is the exclusive owner of their business. But wait, there’s more to it.

Here in Australia, sole trader is also an official business structure, or business type.

Does that mean sole trader is the same as self-employed?

Yes, and no. All sole traders are self-employed, but not all self-employed people are sole traders. Self-employed people can also be in a business partnership or have a limited company.

We’ll get to the differences between these three structures later. But, in a nutshell, the sole trader structure is usually the cheapest and simplest way to set up and run your business.

That’s why more than 139,000 excited new business owners jumped aboard the sole train in 2019/20 - from small retailers and freelancers to consultants, contractors and many others.

Legally, you and your business become one

In the eyes of the law (and the ATO), you and your sole trader business are a single entity.

That means you share the same Tax File Number and ABN. And all the after-tax business profits are yours to do with as you please.

It also means you are personally responsible for:

  • any losses your business makes

  • all the business bills

  • keeping accurate sales and spending records.

So, in many ways, you’re more lawfully wedded than a married couple.

Can a sole trader have employees?

Yes, they can. Being a sole trader doesn’t mean you need to lock yourself away in a secret lair, plotting, creating and building your global (or local) empire all alone.

You can hire fulltime, part-time and casual employees to come on that journey with you.

Like any employer, you’ll need to:

  • understand different types of employee entitlements

  • provide workers’ compensation insurance

  • know your employee tax and superannuation obligations.


What are the advantages of being a sole trader?

Most people choose to be sole traders because it’s a quick, simple and cost-effective path to starting and maintaining a business. Plus, you’re 100% in charge of the show.

Here are things to love about sole trading:

It’s easy to set-up a sole trader business

If red-tape and bureaucracy fill you with frustration and stress, you’ll be in a monk-like state of Zen knowing that becoming a sole trader is a simple, three-step process:

  • register your business name

  • apply for an Australian Business Number (ABN)

  • register for Goods and Services Tax (GST).

Lower costs and less paperwork

The sole trader business structure is designed to make it easy and inexpensive to trade as a business. That’s reflected in the fees and hours involved in setting-up and maintaining the structure. For example:

  • it’s free to apply for an ABN

  • it’s cheaper to register a business name

  • you don’t need to lodge a separate tax return for your business.

Of course, your overall expenses and admin requirements will vary depending on what you sell and how you do it.

For example, a retailer with a shopfront, physical stock and ongoing marketing campaigns will have more expenses and paperwork than a freelance writer typing away on a keyboard in front of a computer.

All the business profits are yours

The money that comes into your sole trader business is seen as your personal income. That means you can keep all your business profits after you’ve paid tax on them. And you can withdraw money from a business bank account.

Your information is private

As a sole trader, your business is your business in more ways than one. Unlike in a limited company, you aren’t required to make details about your activities, performance, directors and shareholders open slather on public record.

You can easily change the business structure

Being a sole trader allows you to test the waters, start small and expand as business heats up. For example, a boom in sales might mean your personal income increases to a point where you’d pay less tax if you used a company structure.

On the flipside, there’s always the risk that business won’t initially be as strong as you’d hoped. If you start as a company, you’ll have invested a lot more time and money into setting up and maintaining the business. Plus, if your profits are low, you’re likely to be at a tax disadvantage. The change from sole trader to company is far easier than the other way around.

You don’t need to pay superannuation

If you’re a sole trader you aren’t required to make super payments to yourself. That can be a benefit when you’re starting out. You may want to keep as much money as possible in the kitty to maintain and build the business.

That said, we’ve also included this point in the disadvantages section. Unfortunately, without the law prompting regular super contributions, many sole traders never lay a nest-egg big enough to support a comfortable retirement.

You control your business

Ask a sole trader what they love most about their business structure and many will say that it’s the control and freedom.

Owning your business, without being accountable to a partner, a Board or shareholders means you really are your own boss.

As a sole trader, you’re the one who ultimately decides where you take your business. Of course, you always need to cater to customer needs. But you choose how your business does that.


What are the disadvantages of being a sole trader?

While there are plenty of bright sides to being a sole trader, there are also some downsides to keep in mind. Being aware of the disadvantages of this business structure can help you to make sound decisions before taking the leap.

You are personally liable

Remember when we said that a sole trader and their business are tighter than a happily married couple? It’s a heart-warming thought…until you realise that being one entity means the business owner is personally responsibility and liable for all the business actions and debts.

In other words, if your business incurs any losses that can’t be repaid, then your home, other personal property and belongings could be fair game for creditors.

It’s more difficult to get a loan

While a sole traders’ personal assets are considered their business assets, banks still see self-employed people as a greater loan risk. And, in recent years, lenders have tightened up their offerings and conditions.

But there is hope. In 2020, the government launched the SME Loan Guarantee Scheme to help small businesses recover from the impacts of Covid-19. The guarantee allows banks to offer loans at very low interest rates and know it will be repaid.

While brand new businesses aren’t eligible for this scheme, it’s likely that new government-backed loan programs will be announced over the next 12 months.

Less attractive to some bigger customers

Lots of people and businesses love to work with sole traders because they want personal, caring service – and get to deal directly with the boss.

However, some big clients, with more money at risk and reputations to uphold, are reluctant to take a chance on a small business over an established limited company.

While it may not always be justified, being a company gives businesses have a level of credibility security and professionalism that sole traders can only earn over time, if ever.

It’s easy to forget to pay your own super

When you’re not legally required to top up your superannuation, it’s easy to skip making regular payments and use the money elsewhere. Research from the Association of Super Funds Australia shows:

  • 20% of Australian sole traders have no superannuation

  • self-employed people have lower super balances than employees

  • self-employed men 60 – 64 years have an average super balance of $143,000.

  • self-employed women 60 – 64 years have an average super balance of $83,000.

If you want to spend your golden years enjoying the fruits of your labour, you need a decent super balance.

Hopefully, your wildly successful sole trader business will bankroll many decades of relaxation and adventure. But, just in case, you should talk to your accountant about the best way to save for the future.


How does being a sole trader affect my tax and GST?

Setting-up as a sole trader in Australia comes with its own little swag of tax advantages and disadvantages.

As we’re not professional number crunchers, take the information below is a general guide. You should talk to your accountant to work out the best tax strategy for your business and goals.

Tax returns are easier

As a sole trader, you only file one end-of-year tax return. You can include all your business expenses and outgoings in your personal tax return.

If your business was a company, you’d need to file separate returns, which is more expensive, time consuming and complex.

You get sole trader tax deductions

Good news: You can claim most expenses that are linked to running your sole trader business.

Even better news: If you operate out of your home, you may be able to claim tax deductions on things like your mortgage, rent, rates, insurance, electricity, phone, furniture and vehicle expenses.

Important, but dull news: You should speak with a small business accountant to know exactly what applies to your business. And keep accurate records of all your income and expenses.

You can learn more about deductions for sole traders on the ATO website

Sole trading may mean higher taxes

As a sole trader, you pay the same income tax rates as individual tax payers. If you’re not earning big money that can work to your advantage. However, as your profits and income increase, part of your earnings could be taxed up to the highest rate of 45%.

To provide some context, the full tax rate for companies is 30%. In other words, once your earnings go over a certain threshold a company structure could be a more profitable option.

The first $18,200 is all yours

Sure, it stings to learn that companies can get taxed at a lower rate than hard-working Joe Public and Saul Trader.

However, because you pay personal tax rates, you do get to enjoy a perk that companies are not privy to. The first $18,200 of your annual earnings are completely tax-free.

(Most) sole traders register for GST

If you believe that your sole trader business will turnover more than $75,000 a year, you need to register for Goods and Services Tax (GST).

Once you’ve been registered for GST, you have to report your business income and expenses for given periods - usually once a quarter or month - in a Business Activity Statement (BAS).

Paying tax and GST four or more time a year may sound like extra work. But it means you’re not surprised by a hefty bill at the tax time – and may even find yourself receiving a nice return.


How does sole trader compare to a partnership structure?

Partnership structures are similar to sole trader, except they’re owned by two or more people. Most of the pros and cons are the same, except that you share both control and liabilities in a partnership.

Joining Australia’s sole trader community could be one of the most rewarding business moves you’ll ever make.

After all, Walmart, Marriott Hotels, eBay and many other household names started out as sole trader businesses.

Beyond the financial opportunities and success, becoming a sole trader means you are the owner of a business, doing something you’re passionate about.

And that’s worth the price of admission alone.


How do I get started as a sole trader?

If the sole trader structure sounds like it may be a good fit for your business, here are some steps to take next:

1. Take advantage of Bayside BEC small business expertise Read other business starter articles and guides

Arrange some 1-1 business advice and coaching

2. Speak to an accountant To determine whether sole trader or another structure is right for your situation, needs and business goals.

3. Set-up your business If you’ve spoken to your accountant and believe that sole trader is the business type for you, head to business.gov.au and:

a) register your business name

b) apply for an Australian business name (ABN)

c) register for GST (if you expect to turnover $75,000 or more)

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