What is a sole trader?
If you’re a sole trader (also called a sole proprietor) you’re the single owner of your business. You have no partners or directors, nobody looking over your shoulder (except maybe a helpful accountant). You’ve got complete authority over every aspect of your business. It’s your empire. You don’t have to run things solo to be a sole trader – you can hire employees. In other words the sole refers to the number of owners, not the number of people working in the business.
Many small businesses start off as sole traders. It’s also an easy option for contractors and self-employed people. As they grow they might decide to change their structure to a partnership or company.
Pros and cons of being a sole trader
If you choose to set up your business as a sole trader - as opposed to a partnership or company - there are some clear benefits.
- Startup costs are minimal
- There are fewer reporting requirements than other business structures
- As mentioned above, it’s all yours - the profits (and the losses)
- Business income and expenses are reported with your individual tax return using a separate Business and professional items schedule
But as with any business structure there are some downsides.
- The debts and liabilities are your personal responsibility and this may put your personal assets at risk if the business fails
- You’re responsible for the superannuation for yourself and any employees
- If want to sell a stake to investors to get business finance, you’ll have to change your business structure
- If you want to sell the business this can be more difficult – especially if you have something that’s very niche – as you need to find someone willing to take over your unique dream
How to register as a sole trader
The process of sole trader registration is quite simple.
- Get an individual tax file number (TFN) for paying income tax
- Apply for an Australian Business Number (ABN)
- Register a business name with the Australian Securities and Investment Commission (ASIC), if you’re not using your own name
- Register for Goods and Services Tax (GST), if you expect your annual turnover to be $75,000 or more
You can do three of these tasks at the Australian Government's Business Registration Service using one online form.
1. Get an individual tax file number (TFN)
If you’ve ever lodged a tax return in Australia you probably already have a TFN. If not, you can apply for one from the Australian Tax Office (ATO).
2. Apply for an Australian Business Number (ABN)
An Australian Business Number is an 11-digit number unique to an enterprise or business. An ABN is a quick way to identify your business to the government and the tax office. You can apply for an ABN through the Business Registration Service.
3. Register a business name
If you plan on using your own name to trade, eg, Riley Jones, you only need to apply for an Australian Business Number (ABN).
But if you’re going to use a business name other than your personal name, you’ll need to register it nationally with ASIC. This means you can operate your business in any state or territory in Australia. Even if you’re just adding something to your personal name you’ll have to register it, eg, Riley Jones Catering.
Difference between a business name and a trade mark
A registered business name doesn’t mean you have exclusive ownership of it. Other people can register and use similar names. To gain exclusivity over your business name, you need to register it as a trade mark with IP Australia.
4. Register for GST
You need to register for GST with the ATO if your annual turnover is $75,000 or more ($150,000 for a not-for-profit), or you expect it to be. If you're not registered for GST, check each month to see whether you've reached the threshold, or are likely to exceed it. If your turnover exceeds the relevant threshold, then you must register within 21 days of reaching it.
Being registered allows you to claim back the GST you’ve been charged for some of the goods and services you use for your business. You can do your GST registration through the Business Registration Service once you have your ABN.
Additional registration tasks
Once you’ve got yourself set up as a sole trader, you might have some additional registration tasks. For instance, if you’re employing staff there are a number of requirements. And depending on your business type, you might have to get licences or permits to operate, or professional qualifications or registrations.
As a sole trader, if you have employees you’ll need to:
- understand your employees’ entitlements
- provide workers’ compensation insurance
- understand your tax and superannuation obligations and register for PAYG withholding
Licences and permits
You may need licences or permits from federal, state, territorial, or local government bodies to legally operate your business. Some common permits are food and beverage, property use and zone permits, and general business licences and permits. Find out what you need from the Australian Business Licence and Information Service.
Professional qualifications or registrations
Depending on your business, you may need a professional qualification or registration. For example, if you want to operate as an electrician you need to be registered and licensed in your state or territory. Check with your industry bodies for their requirements.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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