Different Business Structures: Part 1: Sole Trader

A sole trader is the most simple business structure consisting of an individual trading on their own and operating under their own name or with a registered business name. The sole trader controls and manages the business and is responsible for all debts and liabilities.

Sole trades are subject to the same tax rates as individuals. However, you should be aware that as a sole trade, your assets are potentially more exposed to the risk of litigation.

The followings are the advantages and disadvantages of a sole trader.

Advantages of Sole Trader

• In terms of capital gains tax, sole trader can use 50% discount method to work out capital gains.
• Can use CGT small business concessions
• Can use rollover relief to transfer business into a company
• There is no tax implication for income distribution (no Division 7A) in which you can lend to family members
• Losses can be offset against other income in some situations
• It is inexpensive to establish or run
• Easily understood
• Total control

Disadvantages of Sole Trader

• From an income taxation point of view, sole trader cannot utilize FBT salary packaging
• Personal Services Income Rules apply
• There is limited ability to split income
• Non-commercial loss rules apply.
• Unlimited liability
• Cannot refinance working capital like a partnership can
• Substantiation rules apply for certain expenses

Other articles in this series:

• Company
• Partnership
• Unit Trust
• Discretionary Trust

This article has been prepared for the purposes of general information and guidance only. It should not be used for specific advice or used for formulating decisions under any circumstances. If you would like specific advice about your own personal circumstances please contact our office.