Tax Savings Strategy 207 | The Sole Trader Business Structure

• Simple and easy for clients to understand.
• Cheap to establish and dismantle (basically just need a business name, ABN, GST registration and business bank account).
• No extra tax return required to be prepared and lodged (just the standard I form with the business schedule completed).
• Saves tax if the business profits are low. Companies are taxed 27.5% on each dollar of taxable income whilst a sole trader can earn $18,200 before starting to pay any tax.
• Can be the ideal structure for new start-up businesses that are being trailed and may, or may not, have a long-term future.
• Subject to the non-commercial loss provisions with respect to business losses, individuals can apply the tax losses against their other income. Loss making start-up businesses are often supported by the individual’s employment income until the business becomes viable. The cash inflow from getting PAYG withholding tax refunded by the ATO helps finance the business losses.
• Easy to access the small business CGT concessions.
• Minimal paperwork and government regulation. In contrast, companies are subject to the Corporations Act.

The disadvantages of the sole trader structure are:

• No asset protection – individuals are personally liable for all business debts and legal claims. The individuals private assets (including their home) is at risk.
• Highly profitable businesses will result in tax being paid at the total marginal rate of 48.5% (versus 27.5% for a company).
• No income splitting with spouse or children (unless employed).