A business structure is the foundation that will either hold your business up, or let it collapse. It is important to consider all types of business structures before you finalise this decision, but this article will specifically focus on a sole proprietorship

A sole proprietorship is essentially a business with only one owner. It is the simplest form a business entity can take and is relatively cheap to set up, so it’s a popular option for those who want to keep their business small.. 

As a brief note, the terms ‘sole proprietorship’ and ‘’sole trader’ mean the same thing, and will be used interchangeably throughout this article. Read on to find out more. 

What Is A Sole Proprietorship?

A sole proprietorship (or sole trader) is a business run by one person. In a sole proprietorship, you are the business and the business is you. 

In other words, if the business runs into debt or other financial trouble, you will be tied to these debts by way of personal liability. The debts may require you to sell personal assets as the business. 

On the bright side, however, you receive all the associated benefits of the business. 

You can hire workers, but this means you’ll owe them obligations under the Fair Work Act 2009 just like any other employer. For example, you’ll have to ensure they have a safe space to work in – these are known as your Work Health and Safety obligations

Advantages Of A Sole Proprietorship 

Set Up 

A big advantage of a sole proprietorship is the ease with which they can be set up. The best way to understand its minimal complexity is by comparing it to a company set-up. 

A company requires documents like a Company Constitution, a Shareholders Agreement and a Directors’ Resolution. A sole proprietorship, on the other hand, doesn’t need these kinds of documents since they have less key personnel, they don’t need directors or company secretaries and you’d only really need documents for the business owner and its employees (and in some cases, for suppliers). 

A standard sole proprietorship will likely only require Terms & Conditions (for example, for your website or standard T&Cs with clients) and an Employment Contract with your employees. However, this will depend on the nature of your business and the activities you engage in. For example, if you work with overseas suppliers, you’ll need to draft up more documents to secure your international relationships.

Taxation

Tax obligations are also simplified under this structure. This is because you don’t need to apply for a separate Tax File Number (TFN) for your business – you can use your individual TFN. 

As a sole trader, you can report all your income in your individual tax return using the section for business items which will ask you to show your business income and expenses. This tax will be paid at the same income tax rates as you individually pay in a financial year. The Australian Government provides further information on the differences between taxes under a sole proprietorship and taxes under other business structures. 

Alongside this reduced tax complexity, reporting obligations are also far reduced under a sole proprietorship in comparison to other business structures. So, for instance, in a company, you will need to keep records that show your compliance with your other obligations and legal requirements of companies. You’d need to report any company updates or changes to ASIC.

These sorts of requirements are not imposed in the same way upon sole traders. 

Disadvantages Of A Sole Proprietorship 

Unlimited Liability 

There are still some downsides to being a sole trader. Foremost amongst these is the unlimited liability inherent in the business structure. Under a sole proprietorship, you will be personally liable for all financial or tax debts. There is no division between business assets and your own personal assets. 

So, like we mentioned before, a car you drive solely for leisure can be claimed by your debtors to pay business debts. In a company business structure, though your personal assets can also be at risk if you’re a director of a company and the company can’t pay its debts, liability will generally be limited to company-owned assets and property. 

In a sole proprietorship you are personally liable and responsible for all aspects of running the business.

Taxation

A potential disadvantage, depending on the scale of your business, is the taxing of sole proprietorships. As previously mentioned, you are personally liable to pay taxes for your sole proprietorship. This could be a disadvantage if you own a certain amount, and you may end up paying more tax than you would if your business was set up as a company. 

Raising Capital

A more practical issue is the difficulty in raising funds that comes with a sole proprietorship. Inherent in business is the need for capital to scale up your enterprise. Under a sole proprietorship, this can be very difficult to do. 

You can’t issue stocks or accept money from investors for a share in your business, nor can you rely on the partners in a partnership, or other companies in a joint venture. This can make it difficult if you are thinking of buying into an expensive industry, or anticipate that it will be costly to start up and grow an enterprise. 

How To Start A Sole Proprietorship

The first step to setting up as a sole trader is to register for an Australian Business Number (ABN). 

If you don’t give your ABN to your clients, they must withhold 47% of their payments to you for tax purposes. When you apply for an ABN with the Australian Business Register, you will be asked if you want to register under the sole trader business structure. Say yes to this query and you are on your way!

After registering for an ABN, there are a few more things you might think about, such as the following:

  • Paying your own superannuation (and that of any of your employees) – you might be able to claim a deduction for any personal super contributions you make on your tax return.
  • Sorting out your insurance – this is crucial given the unlimited liability you face under the sole proprietorship business structure. The right insurance can mitigate these risks. 
  • Your income tax options
  • How you’ll be sending out invoices to your customers.

Register A Sole Proprietorship 

Once you’ve decided that being a sole trader is right for you, there are series of steps that must be followed to ensure you are officially registered. 

  1. Decide if you want to operate using a name other than your personal name.
  2. Check your proposed business name doesn’t infringe on existing trade marks.
  3. Register your business name.
  4. Apply for the relevant licences and registrations for your business type, such as a Liquor Licence
  5. Find the right insurance for your business.

Limiting Liability For A Sole Proprietorship 

As this article has made clear, the unlimited personal liability that comes with a sole proprietorship is a big issue to take into account. To mitigate this risk, you want to insert certain clauses in your contracts to limit your liability as the business owner. 

For example, you may want to get legal help with an Exclusion Clause

A contract with an individual client will limit your liability in respect of this individual client However, it’s a good idea to also seek insurance to cover any other person who has not signed your contract and may experience harm from your product or service. 

In this respect, insurance for personal injuries, disability and death should be considered (depending on what your business does).

In this way, legal documents and insurance often work together ⁠— and it’s still a good idea to think about both options as a way to limit your liability as much as possible.

Sole Proprietorship Vs Partnership 

The unlimited liability of sole proprietorships might seem concerning, and rightly so. If you have a potential business partner in mind, a partnership might provide a more attractive option. 

Specifically in regards to limiting liability, a limited or incorporated limited partnership might serve your purpose better. If you have any questions about the differences between a partnership and sole proprietorship, our expert business lawyers can help clear this up. 

Key Takeaways

Business structures are a very important decision in the foundation of your business. The sole proprietorship model comes with many distinct and unique advantages compared to companies and other business structures. 

If you need help or have any questions about which business structure would be best for you, our team of friendly lawyers are happy to help. We offer legal help with:

 You can reach our friendly team at team@sprintlaw.com.au or 1800 730 617.

About Sprintlaw

Sprintlaw is a new type of law firm that operates completely online and on a fixed-fee basis. We’re on a mission to make quality legal services faster, simpler and more affordable for small business owners and entrepreneurs.

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