This article series explores the differences between a sole trader, partnership, a company and a trust.
The is the first instalment of a 4 part series on business structures.
The main practical differences between the business structures involve risk, the ability to share pre tax and post tax income, asset protection/legal ownership, WorkCover insurance for owners and how personal super contributions requirements apply. We also need to take into account the ATO’s personal services income rules, anti avoidance and alienation of income provisions.
The key points of this business structure can be described as follows:
Part 1. Sole Traders
- The owner is the business and will trade under there own name or a registered business name
- The owner wears ‘two hats’ and separates business transactions for personal/private transactions
- The owner is personally liable for all the debts incurred by the business
- The owners cannot employ themselves so they cannot pay themselves wages or take out WorkCover insurance covering themselves. Similarly, as they are not employees, the superannuation contribution guarantee requirements and fringe benefit tax do not apply to the owner.
- Expenses are proportioned, where applicable, to remove deductions for private usage.
Easy to set up
Cheap to run
Low taxation compliance cost – requires a business schedule included in your personal tax return
Standard GST and, if employing staff, PAYG withholding requirements apply.
Minimal ATO concern as low risk and all pre tax income goes to the owner
Personally liable if things don’t go to plan
Sole trader often go for many years without making the minimum super contributions they would have made as an employee working for someone else.
Relies on your clients covering you for WorkCover under their policies (employees of the business need to be cover by the sole traders’ business WorkCover policy).
Generally in first couple of years, no income tax is withheld, so the owner needs to be good with managing money so as to not get caught with a large tax bill in year 2.
No income sharing capability with family other than for direct labour for work actually performed at commercial rates.