A sole trader is the simplest form of business structure, where a person is solely responsible for all aspects of the business, including any financial debts as well as all operations. This business structure is generally the most cost-effective to establish and maintain while giving you full control of important business decisions and assets. A sole trader business structure has unlimited liability, meaning that all of your personal assets are at risk if things go wrong with your business. 

What are the differences between a sole trader and a company?

The sole trader business structure is generally less expensive to set up and maintain than a company. Additionally, sole traders have more control than individuals in a company who share responsibility, but that also means increased liability if something goes wrong with the business. Find out more about the differences between a sole trader and company business structure.

Legal structure

A sole trader is the simplest business structure, which has one owner. That individual owner of the business has no legal separation between the person and the business. In comparison, a company has a more complex business structure and has its own separate legal entity.

Ownership

With a sole trade entity, one individual manages and owns the entire business. A company is an entity separate from its directors, with ownership split amongst members or shareholders.

Set-up costs

Given the basic structure of a sole trader business, it has fewer set-up costs compared to companies who are more complex and are required to pay for the registration of their company with the Australian Government’s Business Registration Service, opens in new window, amongst other initial and ongoing costs.

Record keeping

A sole proprietor has individual responsibility of the operations of the business, as well as maintaining financial records and tax returns. Conversely, a company is more complex in structure and are subject to annual reviews by the Australian Securities and Investment Commission (ASIC). Additionally, companies generally have more recording keeping obligations, including obligations under the Corporations Act 2001 to keep records relating to transactions, financial position and performance for at least 7 years.

Business income

If you’re a sole trader any business income generated is treated as your individual income by the Australian Taxation Office (ATO). You can also withdraw money from your business bank account. With companies, the company earnings belong to the company and not the individuals. Directors of the company will not be entitled to withdraw money as personal drawings from the company’s business bank account. Directors are ordinarily paid a wage and funds can usually only be disbursed to shareholders as dividends.

Business debt liability

Sole traders are personally liable for all business debts in that business structure, whereas in a company business structure, the company is generally liable for all of the business’s debit rather than the individual directors. In contrast, where a company cannot pay its debts, then personal assets of each shareholder and director are ordinarily protected (depending on the type of company). However, suppliers and banks often request directors provide personal guarantees which means that they can be called upon to repay a company’s debts where the company cannot do so.

Insurance

Sole traders and companies may consider which type of insurance to take out, depending on their specific industry. Given sole traders are self-employed who own and run their business, they may want to consider taking out income protection insurance or personal accident insurance to protect themselves from injury and illness.

Pros and cons of a sole trader structure

Sole proprietorships are generally easier and cheaper to set up than a company. Also, sole traders are entirely responsible for all aspects of the business. However, this means that they lack the liability protections extended to companies. Find out more about the pros and cons of the sole trader business structure.

Advantages of a sole trader

  • Comparatively quick and easy to set up
  • Easier to manage tax administration
  • Start-up costs are generally low compared to that of a company.
  • Complete ownership and control of the business
  • Owners keep all the profits after tax
  • Tax losses can be offset against any other earned income.

Disadvantages of a sole trader structure

  • Unlimited liability for debts
  • Can be difficult to raise business capital
  • Hard to take time off 
  • All responsibility on business decisions is yours
  • There may be a lack of flexibility when planning tax
  • Limited capacity for growth
  • Reliance on the funds you raise to keep the business afloat
  • Difficult to change ownership or sell the business.

What are examples of sole trader businesses?

There are many different types of sole proprietorships. Here are some examples.

Tradespeople

  • Landscaper
  • Plumber
  • Electrician
  • Carpenter
  • Gardener
  • Mechanic

Freelancers

  • Writer
  • Photographer
  • Personal trainer
  • Graphic designer
  • Web developer

Gig economy workers

  • Taxi or ride share driver
  • Tutor
  • Food delivery
  • Influencer

Small business

  • Retailer
  • Hospitality business owner
  • Hairdresser
  • Online business owner

Can sole traders have employees?

Sole traders can employ staff. Business owners will need to ensure that they provide workers’ compensation insurance. They will also need to understand their employees’ entitlements and rights, including wages, leave entitlements, notice periods for termination as well as the tax and superannuation obligations.

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Important information

Any advice on this page has been prepared without considering your objectives, financial situation or needs. Before acting and starting a business, you should consider whether it is appropriate for your circumstances.