The pros and cons of becoming a sole trader

A sole trader business structure is the simplest and most common way to start a business in Australia. It offers full control, minimal setup costs and potential tax benefits. However, it also comes with risks such as unlimited liability and some challenges in scaling the business.

Understanding the advantages and disadvantages can help you determine whether being a sole trader is the right choice for your business goals.

When you set up as a sole trader, you make all the decisions – from pricing and marketing to business direction and operations. There’s no need to consult partners or shareholders, which gives you the flexibility to pivot and adapt quickly.

You would pay yourself as a sole trader and report business income as part of personal tax returns. This means you can avoid the complexity of company tax filings. Additionally, you may be eligible for small business tax concessions and deductions, reducing your overall tax burden.

Setting up as a sole trader is fast, straightforward and cost-effective. You just need to register for an ABN, opens in new window (Australian Business Number), ensure you have an appropriate bank account (such as a business transaction account) and, if applicable, GST registration. This differs to companies, which requires ASIC registration and ongoing compliance fees.

Unlike some company types, sole traders are not required to publicly disclose financial records. This helps protect your business’s financial privacy, keeping your earnings and financial details confidential.

Since there are no shareholders or partners, you retain 100% of the profits. This means more financial reward for your efforts, without having to distribute earnings among others.

The biggest risk of becoming a sole trader is unlimited liability. If your business incurs debt or legal issues, your personal assets such as your home, savings or car may be used to cover obligations. This is in contrast with a company structure, where a shareholder’s liability is usually limited.

Sole traders may struggle to secure funding and business loans from investors or lenders, as they may lack the structured financial records and the credibility of a registered company. Scaling a sole trader business can also be challenging due to reliance on a single owner.

While sole traders can benefit from simplified tax reporting, higher earnings can result in significant tax obligations. Companies pay a flat corporate tax rate and sole traders are taxed at personal income rates, which can reach up to 45% for higher income brackets, opens in new window.

As the sole decision-maker, maintaining a healthy work-life balance can become difficult. There’s no built-in team or management structure, meaning you handle all aspects of the business yourself, leading to potential burnout if you don’t focus on sustaining your physical and psychological well-being.

Some customers and businesses view sole traders as less established compared to companies. A registered company (Pty Ltd) may appear more credible and can attract larger contracts and corporate clients with bigger budgets.

Consider business insurance like public liability and professional indemnity insurance to safeguard against legal risks. Set up a separate business bank account to separate personal and business finances.

Consider using accounting software like NAB Bookkeeper to track income and expenses. Set aside money for tax and superannuation contributions to avoid cash flow surprises.

Join local business groups and online communities to build connections. Partner with other sole traders or small businesses to expand opportunities and referrals.

Automate invoicing, payments and scheduling to reduce manual workload. Use marketing tools like email automation and social media schedulers to stay visible without spending excessive time.