Is your business structure right: Sole trader

When starting a new small business one of the first decisions to make is which structure to utilise. The decision can depend on a number of factors such as cost, bureaucracy, control and tax benefits. The four primary structures to be considered are:

  • Sole Trader
  • Partnership
  • Company
  • Trust

It definitely isn’t a case of one size fits all. Different small business owners will have different reasons for starting their business and will also have varying focus on how they wish to run their organisations. This article gives a detailed overview of being a Sole Trader.  


Sole Trader

This is probably the simplest and cheapest means of starting a small business. Take your idea, get your ABN and make it a reality. Okay, the last part isn’t that simple, it takes a lot of hard work and resilience but the initial setup is pretty straightforward and allows you to get an idea up and running as long as the other factors are in place such as capital, stock, premises etc. In addition, tax returns are submitted by you as an individual and not by the business.


Positives

1. You’re in charge. As a sole trader you are the number one person in the organisation. This means that you are the person making all the decisions as it is ultimately your success or failure.

2. As previously mentioned it is a pretty cheap and simple means of setting up in business. This can be a good move in the early stages where working capital is tight and you wish to spend time on the bits you are good at instead of the onerous administration requirements.

3. The profit is all yours, but you should also be aware you are also responsible for all losses so this tempers things a little. However, taxable losses may not be such a bad thing where the early stages of the business are part time and the losses can be offset against your individual earnings made in a salaried position.

4. Speed of decision making. As a sole trader you can be very flexible to deal with threats and opportunities as they occur. You don’t need meeting upon meeting of leadership and project teams in order to make a change. You still need a strong decision making process but can react quickly where necessary.


Negatives

1. The risk is all yours and isn’t just limited to the business assets held. If things don’t work out and you run up a chunk of business debt, your home can be at risk even if there is no debt formally secured against it. While the rewards all belong to you, so do the downsides. While it can be good to have the profit when things are going well it can also be a good idea to have a partner to share the risk and decision making.

2. You can’t know everything. Many businesses fail in the first 1-5 years. Often, it is due to a lack of skills in the areas outside the core skills of the business owner. Skills such as budgeting, cash forecasting and financial management wouldn’t generally be the core skills of a florist and so sometimes it can be necessary to utilise the skills of a professional in this area.

3. It can be difficult to access finance without securing the debt against personal assets such as your home. Banks tend to be quite risk averse and like to see that business owners have put their own funds into the business before they will lend to support. They will also tend to want to see security for the loan.

4. What if you get hit by a bus? The sole trader tends to be the life and soul of the business. If they aren’t in there on a day to day business, the business can very quickly fall apart, especially in the case of micro businesses.

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