Thinking about starting a business on your own? A sole proprietorship is the simplest form of a business structure, as there’s only one owner with full control – and you get to keep all the profits.
But there are trade-offs. There’s no legal separation between you and the business, so you’re personally responsible for all of the business debts and obligations. If that sounds scary, don’t worry. We’ve got all the important information around taxation, your legal obligations, the day-to-day running of the business, plus when to consider other business structures.
What is a sole proprietorship?
A sole proprietorship is an unincorporated business with a single owner. Unlike a company, it’s not a separate legal entity, and that legal distinction matters because there’s no legal protection ring-fencing you from business liabilities.
If your business owes money or is subject to legal action, then your personal assets (yes – your home, car, and even personal savings) can be at risk. This is called unlimited liability.
How a sole proprietorship works day-to-day
- Control and decisions: As the business owner, you have full control over pricing, suppliers, business activities, etc. You are also solely responsible for business decisions and outcomes.
- Name and branding: You can trade under your legal name or register a business name (via ASIC).
- Banking and records: Use a separate business bank account (in a dedicated business bank account) to keep your personal and business assets in their own silos. It helps keep a ‘barrier’ between work and home life, and it also simplifies record-keeping, BAS and tax returns.
- Staff: Sole proprietors can employ staff, but, like a larger business, you’ll need to abide by safety regulations, pay superannuation, handle payroll, and be the point of contact for other legal obligations, such as workers’ compensation insurance.
- Assets: You might own business assets, but because there’s no legal separation, lenders and courts can still reach your personal assets if your business can’t pay.
- Finance: Banks can give you business loans, but they’ll be relying on your personal financial history and need guarantees (because there’s no separate legal entity).
Taxes for sole traders in Australia
A sole proprietorship’s business income is taxed in your hands. In other words, you pay taxes by including the business results in your personal tax return. Here are some need-to-knows:
- Income tax: You report net income (business income minus allowable business expenses) on your individual return. There’s no company tax rate – just your marginal rate.
- GST and BAS: If your annual business turnover meets the threshold ($75,000), you’ll need to register for GST, lodge BAS and claim credits on all eligible business purchases.
- PAYG instalments: You will likely need to pay instalments throughout the year (quarterly) to stay on top of taxes.
- Deductions: Some of the more common business expenses include tools, software, home-office equipment, vehicle (business portion), insurance and other costs that help you operate.
Top tip for international readers: In the United States, a sole proprietorship also files on the owner’s return and might owe self-employment tax (i.e. Social Security and Medicare) via the Internal Revenue Service (IRS) and federal government rules. Australia doesn’t have a ‘self-employment tax’, but superannuation and PAYG are in place for similar reasons. Likewise, the US limited liability company (LLC) provides liability protection – in Australia, the rough equivalent is a company (Pty Ltd).
What counts as income and expenses?
First and foremost: business income and net revenue, including sales, fees for services, commissions and other total amounts earned by your business.
Business expenses also count. These are the costs you incur to earn that income (think tools, subscriptions, advertising, travel, rent of a workspace, merchant fees). Claiming only the business portion is important here.
Finally, don’t forget about record-keeping. Keep all your invoices, receipts and bank statements somewhere safe and easily accessible. Ask any accountant or bookkeeper – they’ll tell you that having good financial records will support your loan applications, tax returns and any potential audits in future.
Checklist: How to set up as a sole trader in Australia
- Lock in your structure: Know the differences between sole proprietorships and other business structures (company, partnership, trust). If you want liability protection, a company will be more suitable.
- Register for an Australian Business Number (ABN): Get an ABN through the federal government’s Business Registration Service.
- Register a business name: If you don’t plan on trading under your legal name, you’ll need to register a business name with ASIC. For certain industries, some permits and licences are handled by the state office or your local council.
- Open bank accounts: Set up a separate business bank account to make record-keeping easier and set up clear flows between your personal and business assets.
- Insurance: Seriously consider different types of insurance – public liability, professional indemnity, cyber, income protection – especially because you’re on the hook for unlimited liability.
- Software: Set up accounting software to invoice, track your expenses, hold receipts and prepare your BAS.
- Compliance: Get to grips with your legal responsibilities (fair trading, privacy, OH&S, etc.).
- Plan for tax: Set aside money for paying income tax and GST. It’s well worth talking to your accountant or tax advisor about PAYG instalments.
Remember, without a separate legal entity, you carry all personal liability for your business liabilities. So keep your books clean, have a separate business bank account, always meet your tax obligations and – perhaps most important of all – reassess your business structure as you grow.
