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Advantages and Disadvantages of Being a Sole Trader

Once you have an idea in mind for your business, you will have to decide what business structure works for you. For many small business owners, they start their new venture as a sole trader.

This blog will explore the pros and cons of sole trading to help you consider whether you should join 800,000 registered sole traders across Australia.

Advantage: Being your own boss

If you ask a sole trader what’s the best thing about their job, they will likely tell you it’s being their own boss. You can run things the way you want without the pressure of a manager looking over your shoulder. You can make the big calls and distribute funds as you see fit. It can also give you greater control over your work/life balance.

Disadvantage: Shouldering all the responsibilities

While being your own boss certainly has its advantages, too much of a good thing can hurt you in the long run. You cannot share responsibility between a business partner or co-founder, and having all decisions made by you can be stressful. From accounting and tax to social media and marketing, you will have to don many hats and broaden your skill set if your sole trader business is going to succeed.

Advantage: Set up is relatively simple

Setting up a sole trader business in Australia is relatively simple. To get started, all you need is an Australian Business Number (ABN) and a business name through the Australian Business Register (ABR). Then you will need to contact the Australian Tax office (ATO) to ensure your ABN and ABR are connected.

Disadvantage: No flexibility in your tax

One of the major differences between sole traders and other business structures is how tax is taken. When you are a sole trader, the law treats the profits of your business as personal income. While there are some advantages, such as having the ability to offset losses against other income you earn and tax breaks, there are some disadvantages, too. Since all your business income will be treated as personal income, the more you make the more your tax increases. Unfortunately, this makes it impossible to access the flat tax rates that companies enjoy.

Another thing to consider is that if you are expecting an annual turnover of more than $75,000 you will have to register for GST through the ATO. This added tax could dampen your paycheck at the end of the day.

Advantage: You keep all the profits

One of the best things about running a business as a sole trader is that you get to keep all the after-tax profits. As a sole trader, you’ve borne the personal risk of assuming responsibility, so you should get the rewards for all your hard work.

Disadvantage: You’re liable to any debts

One of the biggest disadvantages when it comes to operating under a sole trader business structure is that you have unlimited liability. Under the law, there is no distinction between your personal and business assets. This means that your personal assets are at risk if you encounter any liabilities along your business journey.

Luckily, there is sole trader insurance designed to protect you. One of the key types of business insurance that many sole traders consider is Public Liability insurance*. Public Liability insurance* is designed to provide protection if a third party is injured or sustains property damage as a result of your negligent business activities.

The bottom line

Having sole trader insurance and a sound business plan can set your small business up for success in the long run. After weighing up the pros and cons and putting these protections in place, you will hopefully be on your way to launching your business as a sole trader!

This information is general only and does not take into account your objectives, financial situation or needs. It should not be relied upon as advice. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording.
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