Sole Trader Definition
A sole trader is considered one of the easiest types of businesses to start. You must acquire appropriate permits and licenses to operate legally, and you are personally liable for debts, lawsuits, or taxes your company accrues.
Many entrepreneurs love sole trader because of the ownership they have over business decisions and revenue and how easy and cost-effective they are to set up.
But sole traders are strapped with big risks. Increased personal liability, difficulty raising capital, and a perceived lack of professionalism are a few of a pitfalls sole traders must navigate.
So, what’s the low-down on sole traders, and how do you start one? I’ve got an easy guide for you below. Before you start a business, however, it’s important to have a business plan. Here’s an easy-to-use business plan template to begin. If this looks overwhelming, our Business Advisory Specialists would be happy to help. Contact us to make and appointment.
Begin your journey as a Sole Trader
A variety of businesses are operated as sole traders. Because they’re free and easy to start, many people use sole traders to turn their side hustles into something a little more serious -- and lucrative. Here are some examples of common sole traders:
Sole Trader Examples
- Daycare operator
- Freelance graphic designer
- Freelance writer
- Fitness instructor
- Direct salesperson
- Accountant/Tax preparer
- Computer/IT specialist
- Financial planner
- Home healthcare worker
- Virtual assistant
- Event planner
Step 1: Ensure a sole trader is right for you
You will have complete control over the revenue and operations of your business. However, YOU are personally responsible for all debts, lawsuits, and taxed the company accrues. If your business is sued, personal asset like your home, credit rating, and savings are not protected.
Choosing the right business structure is key to your business's success. I emphasise "The business structure you choose influences everything from day to day operations, to taxes, to how much of your personal assets are at risk."
Sole Trader, partnerships, companies and trusts are just a few of the ways you can structure your business.
Sole Trader Advantages
- Full decision-making authority
- Easy to set up (No state registry necessary)
- Free to start (Other fees apply, but you won’t pay the $1000 average cost of starting an LLC)
- Simple tax filing
- Low tax rates
- Balance sheets not required by the IRS
- Full control over revenue
Sole Trader Disadvantages
- Personal assets are at risk
- Increased personal liability for lawsuits
- Business bankruptcy means personal bankruptcy
- Difficulty raising capital
- Self-employment tax
- Many banks require businesses to incorporate before they’ll lend money
- Perceived lack of professionalism
Step 2: Talk to your nearest Small Business expert (DC Advisory Group)
Before you go full steam ahead and establish yourself as a Sole Trader, contact us to understand the steps required in order for you to operate your business legally.
Step 3: Choose a name
Choosing a name is the fun part -- researching whether or not it’s taken and trademarked is where things can become difficult. Search the ASIC to learn whether your chosen name has been trademarked. If it hasn’t, consider filing your name with the Business Registration Service so no one steals your name!
Step 4: Register your Trading Name
As a sole trader, the legal name of your business is your personal name. However, if you want to operate under a different name, say, Matts Magnificent Mowing, you'd want to register Matts Magnificent Mowing as the Trading Name.
Step 5: Purchase a domain
You have your perfect name, its time to go after a domain. For the best client experience, your domain name should be the same as your business.
Step 6: Check on other permits or licences
The fees associated with not having the correct licence or permit can be crippling for a young business. Check here for what you may need. These might include:
- A health department permit for preparing and serving food
- Bluecard for opening a daycare
Step 6: Open a business bank account
It's important to keep personal and business expenses separate when running a business as a sole trader. Opening a business bank account ensure a certain level of protection for your business funds, it allows customers to pay with a credit card and make checks payable to your business, and allows your business to build a good credit score.
Step 7: Load up on insurance
Because one of the biggest risks to starting a sole trader is the liability it burdens the owner with, having adequate insurance is a must.
Consider property and liability coverage, auto insurance, health coverage, and disability coverage, at the very least. This can get expensive, but it ensures you and your personal assets are protected from lawsuits and professional setbacks, should they arise.
Step 8: Pay your taxes
As a sole trader, you'll pay income tax on all income your business nets. Remember, because you are self employed, your income from your business doesn't have proper withholding taken out at the time your are paid.
To avoid a shock at tax time, you should set aside money from each payment to cover any tax bills.
The biggest suggestion I can make here, is engage DC Advisory Group early. We are Business Advisory experts and can help you set up your business.
The information provided in this BLOG is of a general nature only and has been provided without considering your objectives, financial situation or needs. Because of this you should consider whether the information is appropriate considering your objectives, financial situation and needs.