Sole Trading
4. Advantages & Disadvantages
Authors: Staff Legal Eagle
Firm / Chambers:
Last updated: 23 Sep 2015
- The main advantages of operating your business as a sole trader are:
- it is simple to establish and to cease operating as a sole trader;
- it is inexpensive to set up a business as a sole trader. A free and simple online registration process exists;
- as an individual you have maximum control over day to day business operations;
- it is easier to change the structure later if required as the business changes and grows;
- there are more significant Capital Gains Tax (CGT) incentives for individuals than for any other business structure;
- because your business is treated as part of you as an individual for tax purposes you can offset tax losses from investments or wages against other personal income for example through negative gearing; and
- as a sole trader you are not considered to be an employee of your business. This means that you won't have to take the drawings you make on the business into account for:
- compulsory superannuation contributions;
- payroll tax; or
- worker's compensation payments.
- The main disadvantages of operating your business as a sole trader are:
- unlimited personal liability for debts incurred through the business or for wrongs committed through the business such as negligence;
- there is less flexibility when managing taxation. For example you can't split the profits or losses with other family members for whom the business is carried on;
- the Pay As You Go (PAYG) system requires a sole trader to pay tax in quarterly instalments. This can sometimes cause cash flow problems depending on the type of business you are operating; and
- you must provide evidence to substantiate claims for 'fringe benefits' such as business-related tax deductions for vehicle and travel expenses. Maintaining this documentary evidence can be quite time consuming for small business people.
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