A sole trader is an individual running a business. It is the simplest and cheapest business structure. If you operate your business as a sole trader, you are the only owner. Only you control and manage the business. You are legally responsible for all aspects of the business. Debts and losses can’t be shared with other individuals. You are also personally liable if the business is sued and therefore, all your personal assets are at risk.
You can employ workers in your business, but you can’t employ yourself. As a sole trader, you are responsible for making superannuation guarantee payments for your employees. You are also responsible for your own superannuation and may choose to pay it into a fund for yourself to help save for your retirement.
As a sole trader there is no requirement to pay yourself a wage or superannuation from your business. For tax purposes you and your business are considered one in the same. Therefore, unlike a company or trust structure, you can transfer money from a business bank account to your personal bank account any time you like.
At the end of the financial year, the profit made by your sole trader business is subject to taxes at your marginal tax rates. As a sole trader you can’t claim deductions for money ‘drawn’ from the business. Amounts taken from the business are not wages for tax purposes, even if you think of them as wages. Therefore, it is very important that you do not overdraw from the business bank account. You must ensure that you have put aside sufficient funds for taxes.
Disclaimer: This blog post has been simplified to cover some key points of a sole trader business structure. This should not be construed as advice from Glint Accountants. There are many other factors to be considered and each business situation is unique. Therefore, we encourage readers of this blog post to contact Glint Accountants for assistance with their specific circumstances.
Geraldine Lee is a Fellow of CPA Australia and successful business owner with experience with all of the above. Contact us at Glint Accountants for assistance if you are new to running a business as a sole trader and would like advice on tax minimisation or restructuring into a company/trust.