Business Structures – Sole Trader
In Australia, there are four main business structures commonly used by small businesses. They are; sole trader, partnerships, companies and trusts. Each structure has its advantages depending on the needs of the business in the areas of tax, asset protection, control and succession, flexibility as well as set-up and ongoing costs.
In this blog we look at the legal aspects in the above areas for the simplest of the four structures, a sole trader.
There is no ability to split income, all deductions must be substantiated and tax rates are at the marginal rate of up to 46.5%. Good news though is that losses can be offset against profits when in the same class, capital gains attract a 50% discount after 12 months. Also, there are main residence exemptions as well as a number of small business concessions. Land tax considerations vary from state to state but are generally quite favourable for this structure.
Insurance is the only way a sole trader can protect assets, leaving quite an exposure for business and personal assets.
Control and Succession
A sole trader can enjoy total control of their business but cannot move income between family members. A sole trader has the flexibility to move capital in and out of the business as desired as well as change the nature of the business at will. It is important to note that the business will cease upon the death of the sole trader.
Set-up and Running Costs
A sole trader really benefits in this area both from a cost and complexity perspective. Of the four structures, it has the least expensive set-up costs and reporting is simple; with the only requirements being registration of the business name and ATO taxation obligations. Ongoing costs are also lower as there no compulsive workers compensation and no payroll tax or superannuation.
There is very little flexibility for a sole trader. From a taxation perspective, all income must be attributed to the principal, meaning the opportunity to income split, as mentioned above, is not available.
Often business owners will start as sole traders but it is vital to periodically reassess your business direction, strategies and needs to ensure you have the right structure in place for your business.