Are you thinking about your current business structure and wondering if it’s still the right fit for your growing business?
Let’s analyse the risks and benefits of a common business structure: sole trader.
Business structure: Sole Trader
Operating as a sole trader is often a simple and cost-effective way of launching into a new business. Set up costs are minimal, and tax obligations are straight forward. There are also many downsides to consider. To name a few, there’s no ability to income split with low-income family members, and no asset protection (other than insurance) meaning business and personal assets are at risk to creditors or litigation. Let’s look at a real-world example that may work well in a sole trader structure:
Sole trader example – advertising contractor
Rachel has been working as an employee in advertising. Through her professional network she has been offered contracting work from several different agencies. Rachel has negotiated an hourly rate to be paid for her contracting work which well exceeds her previous earnings as an employee. It has been agreed that the time she spends on each contracting job will be documented, and Rachel will issue an invoice to each agency that is reflective of the hours she works each week.
How well does the Sole Trader structure suit this business?
To get off the ground as a sole trader Rachel simply steps through the following:
- Apply for an ABN
- Obtain legal advice to prepare contracts
- Obtain appropriate insurance
- Subscribe to a user-friendly invoicing and accounting system
The income Rachel earns from this type of contracting work is known as Personal Services Income. The ATO does not allow this type of income to be split (for example with a low-income spouse or children that are over the age of 18), so there would be no advantage in selecting a more complex and expensive structure from an income tax point of view.
While Rachel won’t be required to spend large sums of money to purchase assets to run her business, asset protection is still a consideration as her personal assets are not shielded from business debts when operating as a sole trader. However, due to the type of work Rachel does, her business will have few, if any creditors. In relation to litigation risk, Rachel’s lawyer has drafted her contracts and provided advice that her risk is limited. Rachel has also obtained appropriate business insurance.
From Rachel’s point of view the sole trader structure ticks all her boxes due to its simplicity and low set up costs.
If Rachel’s business grows and changes (for example she hires staff to do principal work and expands her suite of business services) she may find that running her business through a company or trust structure will suit her needs better.
Stay tuned for part 2 where we explore the business structure ‘Company’.
At Crest Accountants, we have a range of business structuring services all benefiting from our extensive experience in working with and advising about the processes, systems, and plans, essential to the overall structure and success of a business. We take the time to get to know our clients so that you feel confident we have your best interest at heart.
Contact us and book an appointment to discuss your business accounting needs today.
Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for professional advice.
