How to Start a Business in Australia – Choosing a Business Structure (Sole Trader)

In my last tutorial in this series, we looked at one of the first steps in starting a business – ensuring that you have the right licences. Now it’s time for the next major step – choosing a “business structure”.

A “business structure” refers to the way your business is structured legally. And – just like licencing – it’s ABSOLUTELY crucial that you choose a business structure and actually register it.

It’s amazing how many people either don’t get this right, or skip this step completely. Don’t be one of them. Getting this wrong could destroy your business, and it could destroy YOU.

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But before we go any further, I need to remind you that any information presented on this blog is solely for informational purposes only. I make no guarantee that any of the information on this blog is accurate or complete. I cannot be held responsible for any loss or damage caused by reliance on any of the information or advice provided on this blog. If you are serious about your business, please consult a solicitor, accountant, or business consultant for advice. This blog is NOT LEGAL ADVICE! Any use of the information here is SOLELY at your own risk. For more information about this, please read my disclaimer.
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Business structures are rarely explained well. Even some business books get this stuff wrong at times! Hopefully by the time you finish reading this series of articles you will have a much clearer idea about business structures, and which structure best suits your particular business. Remember, not all businesses will have the same business structure.

Types of Business Structures

Broadly speaking, there are four major types of business structures:

Arguably, the Sole Trader business structure is the most popular one – but it might not necessarily be right for you. Additionally, you may need to change business structures eventually, depending on the needs of your business.

But what do all of the four structures actually mean? In this article, we will look at the Sole Trader business structure.

Sole Trader

The first thing to realise about structuring your business as a Sole Trader is that YOU (and ONLY you) are the business.

In other words, YOU own the business, YOU are directly in control of everything, and all money you make with your business is YOURS. The business is NOT a separate legal entity to you.

That means that come tax time all income you make through your business is counted together with your own personal individual income (so that means it is lumped in with income you make from other sources too – such as a job you might have on the side). Having said that, you’ll still need to fill in some additional tax forms at the end of the financial year. The Australian Taxation Office (ATO) has more information about that here.

So, sounds good so far, doesn’t it? But what does this all really mean?

Advantages of a Sole Trader

Starting off as a Sole Trader is the simplest way to begin a business.

It’s easy to set up (I’ll tell you how shortly)
There is less paperwork (in comparison to the other structures)
It’s MUCH less expensive
There is less government interference and regulation (at least in comparison to a Company)
It offers more privacy (in comparison to the reporting requirements of a Company)
There is less need for hiring lawyers, accountants, and other consultants (at least in comparison to a Trust or Company)

Obviously, these are broad generalisations, but they tend to be true much of the time.

As a Sole Trader, you can still employ people, engage other contractors, apply for financing (although this last part might be more difficult compared to a Company), and do many other things. There is a lot you can do.

And when your business expands, you can always change this business structure more easily compared to other structures.

So, what’s the catch, I hear you say?

Disadvantages of a Sole Trader

Well, the major problem is that the business is YOU (no offence intended …). If you die or become permanently incapacitated, your business ceases to exist. Why? Because your business is YOU. It does not exist outside of YOU. So if you aim to pass on your business to other people in future (eg. family), this could be an issue. This area of the law is called “succession”.

This brings up a further complication, and one of the major weaknesses of this business structure.

Because the business is YOU, YOU are personally liable for any debts, negligent acts, etc that you commit while running your business. You assume ALL the risk and responsibility whether your business succeeds or not.

Every time you sign a contract with someone, it is YOU who is contracting – NOT your business. So if things go wrong, you could lose all your assets, your house, and your future. It’s a risk that you need to bear in mind.

Having said that, with the appropriate insurance cover, you might be able to lower your risks substantially.

Should I set up as a Sole Trader?

Obviously, only you can know that. This entire article is not intended as a full guide to the features of operating as a Sole Trader, but hopefully it gives you some idea as to where to go next.

Your decision whether to structure your business as a Sole Trader might depend on some of the following questions:

Do you have a lot of money to start the business with? Can you afford the expenses associated with setting up, and operating, the business as a different structure (eg. as a Company)?
Do you want the business to be a separate legal entity? If yes, then consider structuring it as a Company instead.
Does it bother you that your business will cease to exist upon your death or permanent incapacitation? If yes, then you may want to consider structuring your business as a Company instead.
Does the personal risk and liability issue concern you? Are you in a particularly risky industry where you may need greater protection (in addition to insurance cover)?
How have your competitors structured their own businesses? (a good way to find out is by searching for them on ABN Lookup)
Are the tax benefits greater than structuring your business as a Company? For example, as of writing, the tax rate on a Company is 30% (before tax is applied again to employee salaries). So depending on the rate of personal tax you might need to pay as a Sole Trader, sometimes it may actually be more effective to structure your business as a Company instead (which you would then become an employee of). This would be especially useful if you wish to use a lot of the profit to further grow your business, rather than adding it to your personal income (where the tax rate may be higher than 30%).

There are, no doubt, other questions that might also apply to you. But hopefully the above questions are a useful starting point.

So, how do I register as a Sole Trader then?

First of all, you need to decide if you want to run your business under your own personal name (eg. “Adam Wozniak”), or whether you want an actual business name (eg. “Wozniak’s Tools” or “Vandelay Industries”…). If you want to run your business under your own personal name (with NO other additions), all you need to register for is an Australian Business Number (ABN).

APPLYING FOR an Australian Business Number (ABN)

Regardless of whether you decide to run your business using your own personal name, or whether you register a business name, you must obtain an Australian Business Number (ABN) and a Tax File Number (TFN). If you have already been employed in the past (or are still currently employed), chances are that you already have a TFN. If you DON’T have one, you will need to obtain one through the Australian Tax Office (ATO). Click here to apply for a TFN.

To obtain an ABN, you will need to apply for it through the ATO too. Thankfully, these days you can obtain an ABN in about 30 minutes without even leaving your computer. Click here to apply for an ABN.

Registering a Business Name

If you want to operate under an actual business name (rather than your own personal name), then you MUST register the business name ~~in your particular State.~~

UPDATE: In May 2012, a new national business names system commenced, replacing the old State system. This actually makes the process easier (and cheaper) than ever. The administration of all business names Australia-wide is now handled by the Australian Securities & Investments Commission (ASIC). To begin the business name registration process, just click here.

If you intend on operating your business in multiple States (eg. if you intend on having a physical presence there), then you will need to register your business name in every State where your business will be located.

~~Registering a business name in one State generally costs about $150 for 3 years. Naturally, if you intend on registering in more than one State, these costs will begin to add up quickly.~~

~~To find out more about the costs and paperwork required, please visit the relevant State office and look for “Business Names”:~~

Some notes to remember about registering your business name though:

You can’t register a business name that is already registered in your State
You can’t register a business name that is already taken as the name of a registered Company
You can’t register a business name that is already registered as a Trademark (eg. “Coca-Cola”, “Google”, etc)
Even if your business name partly contains your own personal name, you STILL NEED TO REGISTER A BUSINESS NAME. Eg. although I wouldn’t have to register “Adam Wozniak”, if I decided to add even ONE additional word that wasn’t part of my name (such as “Adam Wozniak’s Tools”), then I MUST register a business name. This is the part that MANY people get wrong!
Registering a business name is more about consumer protection than it is about protection for your business. In other words, registering a business name, in itself, does not necessarily give you any legal rights to your business name. It gives you less rights than registering your business as a Company, and it gives you even less rights than registering your business name as a Trademark. Basically, a business name has NO legal status in itself.

Despite all of this, registering a business name can be very quick and affordable. And there is a LOT less paperwork required compared to other business structures.

Once you have obtained an ABN, TFN, and registered your business name (if applicable), you need to ensure that your ABN is actually linked to your business name. By default, it might not be. To link your ABN to your business name, telephone the ATO on 13 28 66.

What if I don’t want to register as a Sole Trader?

So those are the basics of structuring your business as a Sole Trader in Australia. Naturally, it’s important that you also consider the merits of the other three major business structures (and especially if registering as a Sole Trader does not appeal to you). It’s important that you consider your options carefully.

Remember, selecting a business structure is NOT an optional step if you want to ensure your business has been set up PROPERLY and LEGALLY. Some groundwork now will save you a whole lot of potential headaches in future. Besides, having a business structure makes your business look more professional and reputable.

In the next tutorial in this series, we will be looking at another type of business structure – Partnerships (where you set up business jointly with others).

UPDATE: Please note that due to an overwhelming number of email enquiries and blog comments over time, I’ve had to disable all contact methods. I am unable to offer any further assistance or advice. If the above article hasn’t answered all your questions, I encourage you to look through the archived comments below. You’ll find frequently asked questions there. Thanks.