What is a Sole Trader?

So, you want to be a sole trader? Or you’re curious about what it means. Well, you’ve come to the right place.

Put simply, a sole trader is a self-employed person who runs a business that typically consists of them, however they can employ others to help run their business.

When you want to start your own business, you will probably ask yourself should I be a sole trader or a company and what is the difference? 

Well, the defining factor is that they are different business structures.

The key difference is that a sole trader and their business are the same entity, sharing the same Tax File Number (TFN) and Australian Business Number (ABN).

A company on the other hand, is treated as a separate entity to the owner with its own TFN and ABN.

There are sole traders across many industries.

You probably have come across one, or even hired one at some point, whether it be a landscaper, electrician, plumber, bookkeeper, caterer or tutor.

What are the Advantages of Being a Sole Trader?

Well, there’s quite a few so let’s list them: 

• You can be your own boss
• You can pick and choose your own clients
• It’s relatively quick to set up
• It’s the simplest and cheapest business structure to set up
• As the sole owner, you control and manage the business the way you want to
• The money you earn belongs to you, not a company
• You can use your own Tax File Number (TFN) to lodge tax returns as opposed to a separate TFN that is required for other business structures
• You can employ others
• You only need to keep financial records for at least 5 years. 

What are the Disadvantages of Being a Sole Trader?

Weighing up the risks of any undertaking is important, so here are some sole trader drawbacks to consider:

• You are legally responsible for all aspects of your business, including any debts or losses
• Liability is unlimited, so all your personal assets are at risk if things go wrong, as opposed to a company structure where the company’s assets would usually be at risk and not your own
• You will most likely need to get insurance to offset your risks, which can be expensive
• You are responsible for paying your employees’ super as well as your own
• You are personally liable to pay tax on all income
• No paid leave or sick pay
• If your home doubles up as your workplace where you meet clients, you may find there’s a lack of privacy.

Does a Sole Trader Need an ABN?

Yes, sole traders are required to get an Australian Business Number. 

An ABN is a unique combination of 11 digits designed to make it easier for the Australian Taxation Office (ATO) to identify businesses.

An ABN is compulsory if you are running an enterprise or business (not a hobby) regardless of annual revenue.

It is compulsory to register for GST if your annual turnover is $75,000 or more (including GST) and you need an ABN to register for GST.

Should You Be a Sole Trader?

Good question. The answer is really up to you. 

It’s a personal choice. You may want to talk to an accountant to help work out your best option, as this article is a general guide only. 

Below is one sole trader’s account of why she chose this path.

Alicia’s Story

Early childhood educator Alicia Ochoa had a strong urge to be her own boss after working at childcare centres for more than three years.

So, in 2017 she bit the bullet and opened her own family day care after shelling out about $3000 in set-up costs, including meeting child safety regulations.

Alicia says she chose to be a sole trader because of the lower start-up costs involved, but she also took on many tasks that she had no experience in to help cut costs.

“A great challenge for me was accounting, but once I learned how to use my accounting software, my life became easier and I was proud of myself,” she said.

“I have learned how to problem solve, to be more creative and how to juggle tasks better.”

But the biggest bonus for Alicia is the freedom to run the day care her way.

“My first year was so stressful as I cared about so many details, but now I have learned to relax a bit,” she said.

“I love training the kids to be organised and responsible for their environment and to make good choices, to be kind and to care for each other.”