The term ‘sole trader’ gets thrown around a lot in the small business world and can sometimes cause some confusion with what type of business set up it is relating to. We are here to help shed some light and details on what some of the most common types of sole trader business structures are in Australia and how they work.
What is a sole trader business?
While there are many different types of business structures around the world, surprisingly the good old sole trader is one of the simplest. This type of business is run by a sole trade, the one person who is legally responsible for looking after all of the business affairs and issues.
The structure involves the owner who is accountable for all the profits and losses of the business which are recorded on their personal income tax return.
Being an owner of a sole trader business also means you are liable for paying any of the required liabilities of the business. Therefore if your business was to default on any financial obligations, as the owner you would be held personally responsible.
Operating as a sole trader is a popular and attractive option for many small business owners with its low costs and flexibility in structure options. Let’s take a look at these different kinds of sole trader business structures in greater detail.
Different types of sole trader business structures
In Australia there are three main types of sole trader business structures:
1. Self-employed owner
Being a self-employed owner essentially means you conduct your business or trade with the purpose of earning a profit. This type of sole trader structure can be operated on a full-time or part-time business, depending on the needs, limitations and goals of the business.
When you operate as a self-employed business owner there is typically no contractual relationship between you and your customers or clients. There is also no traditional employer-employee relationship arrangement in place.
2. Franchise
Another popular structure for a sole trader business is the franchise. The franchise model works with the sole trader (also known as the franchisee) signing an agreement with a franchisor to use their company brand in exchange for an agreed fee or other financial contract.
One of the restrictions around entering into a franchise agreement, is that you are obliged to stick to the franchise’s established business model that has been provided in advance. The model puts you in charge of a whole range of aspects of the business including things like marketing, operations and how you plan to expand the business.
When operating under a franchise structure, as a franchisee you are expected to pay the franchisor royalties. Every franchise is different and will have their own arrangement but it is generally a percentage of the gross sales sold by the business unit.
The franchise model is an attractive model for many sole traders, especially those who have had minimal experience, with the franchisor providing the guidance and support to help set up the business. It is also a model that can often be expanded into international markets with ease due to the franchisor’s knowledge of different local markets.
3. Independent contractor
The last of the three sole trader business structures is the independent contractor. It is a lot like the structure of a self-employed owner with the main difference being that an independent contractor works for an employer to perform certain duties.
While working as an independent contractor for an employer, you will still need to pay your own tax as it is not deducted from your pay and will not be entitled to receive the typical perks and benefits provided to employees of the business.
An advantage of working as an independent contractor means you have the freedom to accept or decline assignments, giving you more control over the type of work you do and the load.
Summing it up
These are three of the most popular types of sole trader business structures in Australia. Being relatively easy to set up makes it an attractive option for many small business owners starting out on their own.
Compared to other business structures, sole traders have fewer reporting requirements and a variety of option to offset business losses against other incomes. If things change over time, the structure is also easier to change or dissolve if needed.
Just like any other type of business, sole traders are exposed to the real-life risks of operating. That’s why it is important to consider protecting your business with the appropriate kinds of insurance to suit your business’ needs.
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