Business in Australia (ABN):: The Advantages and Disadvantages of a Sole Trader Business

Hello, this is your tax accountant, P&C Tax Professionals.

If you are planning on starting a new business, one of the initial decisions you must make is determining the most suitable business structure for your new business. Here, sole trading is considered to be the most uncomplicated business structure you can take up which grants you complete authority over your business. However, as expected, it does carry both positive and negative aspects which will be explored further in this blog post.

Advantages of Being a Sole Trader

There are numerous benefits to being a sole trader, and one of the most predominant advantages is having complete authority over all aspects of your business, allowing you to construct your business according to your preferences.

Moreover, many people may be deceived by the name but it is important to note that being a sole trader does not mean you must work alone with no other employees. You can still hire workers to support you in running your business, but you must ensure that you comply with all of the relevant legal and tax regulations associated with employing staff such as providing them with superannuation contributions.

Whether you work independently or with a team, the uncomplicated nature of this business structure is a significant advantage as it results in relatively low set-up costs, which can especially be beneficial for those of you who are in the initial stages of starting out your business.

Fortunately, as a sole trader, paying taxes is a simple process. This is due to the fact that sole traders are taxed at exactly the same individual tax rate as resident taxpayers, implying that you would also be able to benefit from the tax-free threshold if you are also an Australian resident for tax purposes. This means that if your taxable income (after all deductions have been applied) falls below the specific amount ($18,200 for the 2021-23 financial year), you will still be required to lodge a tax return, but in this case, you will have no tax liabilities.

Disadvantages of Being a Sole Trader

There are also some drawbacks associated with being a sole trader that you should be aware of. Since, as a sole trader, there are no directors, partners, or shareholders within the business, you must solely rely on the finances you can gather personally to support your business. This may considerably restrict the business’s growth potential and it can also make the transfer of ownership or selling of the business quite challenging.

Although paying for your tax liability as a sole trader is comparatively simple, there are further disadvantages that exist when it comes to the tax treatment of sole trader businesses. For instance, you will not have access to the fixed tax rates (25% or 30% for the 2023 financial year) that companies are able to apply on their tax return. This may have a significant impact if your business is generating sufficient revenue which will place you in a higher tax bracket ranging from 32.5% up to 45%.

I hope today’s blog post has been beneficial to everyone but as always, if you have any additional questions, you can contact us through our official Facebook Page (P&C Tax Professionals – Australia) or by sending us your enquiry to pnctax@naver.com.

Thank you and bye for now!