Different Business Structures: Part 1: Sole Trader

A sole trader is the simplest and most cost-effective business structure in Australia. It involves an individual operating a business in their own name or under a registered business name. Sole traders are in full control, they manage the operations and bear all the risks, including debts and legal liabilities.

This structure suits many small businesses and independent professionals. However, with simplicity comes personal responsibility, and it's important to understand both the advantages and the limitations before choosing this path.

Advantages of Operating as a Sole Trader

• 50% CGT Discount Available

  Sole traders are eligible to use the 50% discount method for calculating capital gains tax.

• Access to CGT Small Business Concessions

  This includes the 15-year exemption, retirement exemption, rollover, and active asset reduction.

• Rollover Relief

  You can transfer your business to a company at a later stage without triggering an immediate tax bill.

• No Division 7A Complications

  Unlike companies, sole traders can lend money to family members without tax penalties.

• Offset Business Losses

  In some cases, business losses can be offset against other income (e.g. salary or investment income).

• Low Start-up and Running Costs

  It’s inexpensive to set up and has minimal compliance requirements.

• Full Control and Simplicity

  You make the decisions and retain full autonomy over business direction and operations.

Disadvantages of Being a Sole Trader

• No Access to FBT Salary Packaging

  Sole traders cannot access the tax benefits of providing fringe benefits to themselves.

• Personal Services Income (PSI) Rules Apply

  If more than 50% of your income is from your personal effort or skills, PSI rules may limit deductions.

• Limited Income Splitting

  You can’t easily share income with a spouse or family member for tax purposes.

• Non-Commercial Loss Rules

  If the business doesn't pass certain tests, you may not be able to deduct losses against other income.

• Unlimited Personal Liability

  There is no legal distinction between you and your business, your personal assets may be at risk.

• Limited Financing Options

  Unlike partnerships or companies, refinancing working capital can be more challenging.

• Strict Substantiation Requirements

  Certain expenses require detailed records to claim as deductions.

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Disclaimer:

The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.