In my last post, we looked at one of the first steps in starting a business - ensuring that you have the right licences/permits/registrations. Now it’s time for the next major step - choosing a “business structure”.
A “business structure” refers to the way your business is organised legally. And - just like licencing - it’s ABSOLUTELY crucial that you choose a business structure and actually register it.
It’s amazing how many people either don’t get this right, or skip this step completely. Don’t be one of them. Getting this wrong could destroy your business, and it could destroy YOU.
Business structures are rarely explained well. Even some business books get this stuff wrong at times! Hopefully by the time you finish reading this series of posts you will have a much clearer idea about business structures, and which structure best suits your particular business. Remember, not all businesses will have the same business structure.
Types of Business Structures
Broadly speaking, there are four major types of business structures:
- Sole Trader
- Partnership
- Trust
- Company
Arguably, the Sole Trader business structure is the most popular one - but it might not necessarily be right for you. Additionally, you may need to change business structures eventually, depending on the needs of your business.
But what do all of the four structures actually mean? In this article, we will look at the Sole Trader business structure.
Sole Trader
The first thing to realise about structuring your business as a Sole Trader is that YOU (and ONLY you) are the business.
In other words, YOU own the business, YOU are directly in control of everything, and all money you make with your business is YOURS. The business is NOT a separate legal entity to you.
That means that come tax time (coming soon!) all income you make through your business is counted together with your own personal individual income (so that means it is lumped in with income you make from other sources too - such as a job you might have on the side).
Sounds good so far, doesn’t it? But what does this all really mean?
Advantages of a Sole Trader
Starting off as a Sole Trader is the simplest way to begin a business.
- It’s easy to set up (I’ll tell you how shortly)
- There is less paperwork (in comparison to the other structures)
- It’s MUCH less expensive
- There is less government interference and regulation (at least in comparison to a Company)
- It offers more privacy (in comparison to the reporting requirements of a Company)
- There is less need for hiring lawyers, accountants, and other consultants (at least in comparison to a Trust or Company)
Obviously, these are broad generalisations, but they tend to be true much of the time.
As a Sole Trader, you can still employ people, engage other contractors, apply for financing (although this last part might be more difficult compared to a Company), and do many other things. There is a lot you can do.
And when your business expands, you can always change the business structure much more easily compared to other structures.
So, what’s the catch, I hear you say?
Disadvantages of a Sole Trader
Well, the major problem is that the business is YOU. If you die or become permanently incapacitated, your business ceases to exist. Why? Because your business is YOU. It does not exist outside of YOU. So if you aim to pass on your business to other people in future (eg. family), this could be an issue. This area of the law is called “succession”.
This brings up a further complication, and one of the major weaknesses of this business structure.
Because the business is YOU, YOU are personally liable for any debts, negligent acts, etc that you commit while running your business. You assume ALL the risk and responsibility whether your business succeeds or not.
Every time you sign a contract with someone, is is YOU who is contracting - NOT your business. So if things go wrong, you could lose all your assets, your house, and your future. It’s a risk that you need to bear in mind.
Having said that, with the appropriate insurance cover, you might be able to lower your risks substantially.
Should I set up as a Sole Trader?
Obviously, only you can know that. The above is not intended as a full guide to the features of operating as a Sole Trader, but hopefully it gives you some idea as to where to go next.
Your decision whether to structure your business as a Sole Trader might depend on some of the following questions:
- Do you have a lot of money to start the business with? Can you afford the expenses associated with setting up, and operating, the business as a different structure (eg. as a Company)?
- Do you want the business to be a separate legal entity? If yes, then consider structuring it as a Company instead.
- Does it bother you that your business will cease to exist upon your death or permanent incapacitation? If yes, then you may want to consider structuring as a Company instead.
- Does the personal risk and liability issue concern you? Are you in a particularly risky industry where you may need greater protection (in addition to insurance cover)?
- How have your competitors structured their business?
- Are the tax benefits greater than structuring your business as a Company? For example, the current tax rate on a Company is 30% (before tax is applied again to employee salaries). So depending on the rate of personal tax you might need to pay as a Sole Trader, sometimes it may actually be more effective to structure your business as a Company instead (which you would then become an employee of). This would be especially useful if you wish to use a lot of the profit to further grow your business, rather than adding it to your personal income (where the tax rate may often be much higher than 30%).
There are, no doubt, other questions that might also apply to you. But hopefully the above questions are a useful starting point.
So, how do I register as a Sole Trader then?
First of all, you need to decide if you want to run your business under your own personal name (eg. “Adam Wozniak”), or whether you want an actual business name (eg. “Wozniak’s Tools” or “Vandelay Industries” …). If you want to run your business under your own personal name (with NO other additions), all you need to register for is an Australian Business Number (ABN).
Obtaining an Australian Business Number (ABN)
Regardless of whether you decide to run your business using your own personal name, or whether you register a business name, you will still need to obtain an Australian Business Number (ABN) and a Tax File Number (TFN). If you have already been employed in the past (or are still currently employed), chances are that you already have a TFN. If you DON’T have one, you will need to obtain one through the Australian Tax Office (ATO). Click here to apply for a TFN.
To obtain an ABN, you will need to also apply for it through the ATO. Thankfully, these days you can obtain an ABN in about 30 minutes without even leaving your computer. Click here to apply for an ABN.
Registering a Business Name
If you want to operate under an actual business name (rather than your own personal name), then you MUST register the business name in your particular State. If you intend on operating your business in multiple States (eg. if you intend on having a physical presence there), then you will need to register your business name in every State where your business will be located.
Registering a business name in one State generally costs about $150 for 3 years. Naturally, if you intend on registering in more than one State, these costs will begin to add up quickly.
To find out more about the costs and paperwork required, please visit the relevant State office and look for “Business Names”:
Australian Capital Territory - Office of Regulatory Services - http://www.ors.act.gov.au
New South Wales - Office of Fair Trading - http://www.fairtrading.nsw.gov.au
Northern Territory - Department of Justice - http://www.nt.gov.au/justice/
Queensland - Department of Employment, Economic Development and Innovation - http://www.consumer.qld.gov.au
South Australia - Office of Consumer and Business Affairs - http://www.ocba.sa.gov.au
Tasmania - Consumer Affairs and Fair Trading - http://www.consumer.tas.gov.au
Victoria - Consumer Affairs Victoria - http://www.consumer.vic.gov.au
Western Australia - Department of Commerce - http://www.commerce.wa.gov.au
Some notes to remember about registering your business name:
- You can’t register a business name that is already registered in your State
- You can’t register a business name that is already taken as the name of a registered Company
- You can’t register a business name that is already registered as a Trademark (eg. “Coca-Cola”, “Google”, etc)
- Even if your business name partly contains your own personal name, you STILL NEED TO REGISTER A BUSINESS NAME. Eg. although I wouldn’t have to register “Adam Wozniak”, if I decided to add even ONE additional word that wasn’t part of my name (such as “Adam Wozniak’s Tools”), then I MUST register a business name. This is the part that MANY people get wrong!
- Registering a business name is more about consumer protection than it is about protection for your business. In other words, registering a business name does not necessarily give you any legal rights to your business name. It gives you less rights than registering your business as a Company, and it certainly gives you even less rights than registering your business name as a Trademark. Basically, a business name has NO legal status in itself.
Despite all of this, registering a business name can be very quick and affordable. And there is a LOT less paperwork required compared to other business structures.
Once you have obtained an ABN, TFN, and registered your business name (if applicable), you need to ensure that your ABN is actually linked to your business name. By default, it WON’T be. To link your ABN to your business name, telephone the ATO on 13 28 66.
What if I don’t want to register as a Sole Trader?
So those are the basics of structuring your business as a Sole Trader in Australia. Naturally, it’s important that you also consider the merits of the other three major business structures (and especially if registering as a Sole Trader does not appeal to you). It’s important that you consider your options carefully.
Remember, selecting a business structure is NOT an optional step if you want to ensure your business has been set up PROPERLY and LEGALLY. Some groundwork now will save you a whole lot of potential headaches in future. Besides, having a business structure makes your business look more professional and reputable.
Next time we will be looking at other types of business structures - namely Partnerships (where you set up business with additional people). You can’t afford to miss that one!
See you then! :)
Adam Wozniak
“Chief”
wecancreate
ABN 14 839 865 210
Affordable, small business web design with a difference!
Visit us at www.wecancreate.com
i checked it.., followed your rules and got myself an ABN! so if a mind like mine can do it.., anyone can. thanks for that Adam
mirek :)
My pleasure. I’m glad it has helped someone! :) Did you have any difficulties?
Stand by in the following weeks as I cover some of the other business structures, etc.
Hi Adam,
Very informative article! I’d set my business up just like this about 2 years ago, and your article has quelled my fears whether I had done it properly. Thanks for writing an article about law in such a summarised form.
Sean.
Thank you, Sean. :) Glad to hear you got something out of the article.
How is your business going?
Really well at the moment. Its just a part-time thing, but things have really picked up recently, its really good. It doesn’t seem that this recession stuff has had a whole lot of effect in the web industry.
Thanks again!
Thanks for the great rundown.
I’m assuming a sole trader can’t have employees but can a sole trader contract someone to do some work?
For example my daughter may do some graphic design work for some software I’m developing. Can I as a sole trader pay her for her work?
Hello Adam,
Thanks for your comment. Glad to hear this blog post has helped you. :)
From what I understand, there is nothing preventing you from employing staff as a sole trader. The main restriction with being a “sole” trader is that YOU are the ONLY person responsible for the entire business - so you can’t have anyone else sharing that responsibility with you. And, obviously, the business is NOT a separate legal entity either.
But apart from that, you can still do most other things as a sole trader. So you could certainly employ people - such as your daughter - either as employees, or as independent contractors.
Using independent contractors CAN be more beneficial (especially when you’re starting out, depending on your industry of course). You then don’t have a lot of the paperwork nightmares that you would if you were officially employing people.
If you ARE going to use contractors, then what you are actually doing is simply engaging OTHER “sole traders” who have their own ABNs too. The contractor is technically running their own one person business, just like yourself! :)
The above is, of course, just a simplified outline. I do encourage you to consult the relevant government departments. My blog post on licensing also might help:
http://www.wecancreate.com/blog/legal-issues/start-business-australia-licencing/
That post doesn’t specifically deal with employees, but you will find that if you use one of the BLIS web links, you will get access to the required paperwork you would need to fill out if you were considering employing people. There are many factors to consider, some of which include taxation, registering as an employer, workers compensation, superannuation, awards, etc. There can be complex Federal and State requirements for employing people.
A good point to start would be to take a look at the following links:
http://www.business.gov.au/Business+Entry+Point/Business+Topics/Employing+people/
http://www.business.gov.au/Business+Entry+Point/Business+Topics/Independent+contractors/
http://www.lawhandbook.sa.gov.au/
You may have already come across those previously.
And again, none of the above constitutes business or legal advice. But I hope it gives you a good starting point to commence your enquiries. :)
Hope it helps!
PS: What kind of software are you developing? Or is it too early for you to say? :P
Hi Adam
Great article - best i’ve found on net so far - I’m hanging out for the next one - trying to decide whether to open a trust or company. What is the ETA?
cheers Ange
Hi Angela,
Thanks for your comments. I too have found it difficult to find relatively comprehensive (but, above all, SIMPLE) guides to these things.
I am currently working on the next one - a blog post on the Partnership business structure. The goal is to have that online within the next week, and then hopefully to follow up with blog posts about Trusts and Companies in the weeks following that.
Knowing that there are people out there reading these posts, and actually finding them useful, certainly helps with the motivation to write these. :)
So thank you again.
What sort of business are you planning on starting?
[...] my last post, we looked at one of the four main business structures in Australia - the Sole Trader structure. [...]
Thanks so much for this information. I am just about to launch a business with a friend and we had tried to figure out how we will both run things under one name. This has answered my question and a partnership it will be. I will be spending a lot of time reading everything on this site. Thanks a million!
Hi Cathy,
Thanks for your comments. Glad to hear this site has helped you make a decision. :) I take it you had a look at the specific blog post about Partnerships too?
http://www.wecancreate.com/blog/legal-issues/start-business-australia-choosing-business-structure-partnership/
What sort of business are you opening with your friend? :)
Hi Adam, I thought I replied to this but with pc problems I see it did not go through.
We are starting an expo business that will incorporate direct advertising.
We live in an area that is growing fast yet the networking side of being in a business does not work well here so we hope to introduce old business to new business and ultimately teach them that working together with like minded people can benefit a business, not harm it.
By getting them together to show what the region can offer the public as a whole and teaching them how to network we can only improve our area.
Hi Cathy,
Sounds great! :) Let us know how you go, and feel free to post up a link here when you have your website up and running. :)
[...] last few posts, we’ve taken a look at two of the four main business structures in Australia - the Sole Trader business structure, and the Partnership business structure. Now it’s time to look at another business structure - [...]
great site…. helped greatly with commerse assignment :) thanks!
Hahaha, wasn’t expecting to hear THAT! :P
Hi ! I am in Australia only for 6 months, and I want to develop my old hobby in a business - I want to take pictures in a professional way for people (weddings, birthday party, festivity). I did this think in my native conuntry for 12 years. So, I want to be a Photographer, Sole Trader. I didn’t find the information if I need a licence for this activity in South Australia (I am in Adelaide now). So, please..could help me with a link…?
I understood that I need my TFN (I will use only my name) but I don’t know how ATO find about me and that I started an activity?(for taxes…of course) It is necessary to sent an email to ATO, to anounce them in a way that I start a business?
Hi Dyanna,
Thanks for your message.
Sounds like a good business idea. :) For more information about possible licenses you might need, check out my article on licensing at:
http://www.wecancreate.com/blog/legal-issues/start-business-australia-licencing/
Regarding your other question, beyond a TFN and ABN you generally don’t need to notify the ATO about your business. That’s basically the purpose of registering an ABN (so make sure you don’t forget to do that!). Then it will be up to you to ensure you complete the required business paperwork every year for your tax return.
There are some good links at the ATO website:
http://www.ato.gov.au/businesses/
http://www.ato.gov.au/youth/content.asp?doc=/content/66884.htm
http://www.ato.gov.au/corporate/content.asp?doc=/content/00199712.htm
Hope that helps.
Hi Adam,
As someone who is just about to start my own business for the first time, I’ve been searching all over the internet seeking answers to my questions before I make my first trip to the accountants / lawyers as so I don’t sound like a total knuckle head when I get there. Your article on sole traders is the best & easiest to read that I have come across and has helped me enormously - so a big THANK YOU.
Quick question whilst I’m here - so you are saying that as a sole trader, only when I was to have a physical presence in other states, I would then need to register additional seperate business names ?
I ask as I am considering starting up as a Sole Trader firstly and the business I plan to establish is a consulting business whereby whilst I would be based in Victoria, I would be planning to deal with people & organisations in other states in Australia and ultimately ( & hopefully ! ) make plenty of sales in other states as well. As my one & only physical office would be in Melbourne, but I would be speaking to & dealing with people all over Australia - I only need to register one business name in Vic, but be OK to trade around the country ?
Hope that makes sense & look forward to your reply.
Cheers !
Hi Adam,
Thankyou so much for this article. I have been searching the internet alot on the topic and just like the others before me i have found this to be the most informative and straight forward explanation.
The question i have is, after initially setting up a soletrader, the business hopefully starts to do well and i decide that it is better to operate the business as a company, can i convert a sole trader to a company or do i have to start up a whole new buiness entity?
Due to money and time constraints i find that a sole trader is an immediate option but the benefits of being a company might be more appropriate as the business grows.
Regards,
Angelo.
Hi Adam, i am looking at starting up as a sole trader ad your info above is great however i need to know more about how the payg tax and super is worked out. Can you help out with that or do i need to see an accountant?
REgards
alec.
hi adam,
thanks for the info.
i have just completed a massage course and am in the process of setting up an abn, insurance & all that, so that i can be a sole trader..
i haven’t done anything like this before, so i thought that i would try & suss it out on the net to see if i’d missed anything & you’re blog easily goes through each point to think about.
one question that you may be able to help me with is, i am not sure if i am required to set up a separate bank a/c for the business.. i spoke to my bank the other day & they told me that i did for tax reasons, what do you suggest?
i was thinking to just have a separate one, so that when tax time came around, it would be easier for me to print off a succinct summary of transacations, etc..
thanks & regards,
liam
I found it to be very helpful resource for someone looking to start a new business in Australia as Sole Trader
Adam,
which types of marketing can a sole trader use?
I meant legally allowed?
Thanks
Regards
Ada
Hi Adam’
Thanks for your very informative article. One question; do I really need a business name if there’s not a need to advertise the business. I’ve actually set up one now but can I amend it to trading as my own name once the 3 years expires to save costs?
Hi Adam
Just a question l am a mechanic who has been working on a casual basis a person who has a one man workshop. He has now asked me to get an abn and work as a sole trader. Can l do this become a sole trader and work only for the one person. He wants me to invoice him weekly for my hours and that
he will pay them yes on a higher rate than what l was on as a casual. To work out an hourly rate l would have to take into consideration my superannuation, taxation, insurances, and sick/holiday pay. I am not sure what percentage l should put on to cover these payments. Also Adam as a mechanic working in his single bay workshop do you know what type of insurances l would require. Is this worth me venturing this way or think about finding employment elsewhere.
thanks
Kevin
Hi Adam,
Great article. I do have one thing to ask that Im not sure about. If I become a sole trader, then want to register a company is there any hassle going from one to the other?
Thanks so much
Suzanne