Are you a sole trader?

Posted by 29/04/2020 News and advice No Comments

Setting up a business as a sole trader is without doubt the easiest way to get started in business.

Whether you are about to set up a business or you have already taken that step and are now operating, you may be happy using the sole trader setup. After all you only need a to register a business name and register for an ABN, online. All very easy.

But are you mindful of the risks?

Being in business is a risky. In fact according to Forbes, around 20% of small business don’t make it past the first year of trading and by year 5, only 50% are still around to tell a story. while starting out as a sole trader might seem like the easiest and right thing to do, there are risks involved.

As a sole trader, you are subject to “unlimited liability”. This means that the liability/risk/obligations of the business rest solely with you the individual and business owner. You are the business.

Here are some of the realities you may face with “unlimited liability”.
– To begin with you are placing a huge risk on you, your family and your business.

– Any debt you incur in the business, is also incurred personally. That places your personal assets at risk.

– If an employee pursues your business for compensation or wrongful dismissal, you as the sole owner of the business, also take this on personally.

– In the same way, the risk of you being sued by a customer puts your personal assets on the line.

– The risk of you defaulting your home loan, may also affect the assets in your business.

– The possibility of you being unable to pay your business creditors could put your family home at risk if the creditors decide to take recovery action against your business.

At Accountants 360, we want you to limit the risk you take going into business, especially when there are other structures that can create “Limited liability” and separate yourself from the risk of business.

Tax Rates and tax planning
As a sole trader, you are treated as an individual for tax purposes and the business simply forms part of your overall tax return. Any profits go straight to you.

Once your business profit is added to all your other sources of income (any other jobs, salary, wages, dividends, rental income) you pay tax at marginal rates. Dependent on your combined income, this rate can quickly increase to a maximum of an eye watering 49%!

 If we compare this top marginal rate of 48% to other structures such as a company – 27.5% for small business enterprises, or 0% for a discretionary trust, there are some potential tax savings that you could be missing out on.

Not only is the tax rate for a sole trader potentially very high, there is no chance of distributing profits to various entities. In a trust for example, the profits can often be distributed to members in a family group and could lead to a much different tax bill.

In summary, structuring your business is a complex task that requires serious expertise. Assuming that being a sole trader is just the easy, quick way to get started has serious potential of hurting your business in the long run.

Please give us a call to discuss your business, your current circumstances and your future goals. Then we will be able to point you in the right direction and ensure that you aren’t just a negative small business statistic.