What is a sole trader?

A sole trader has no separate legal identity: you and the business are the same for contracts and debts. You make the decisions, receive all profits after tax, and can draw funds as needed without formal salary arrangements. Set-up and administration costs are lower than for a company or trust, and there are no director obligations or separate company return, though a business loss can generally be offset against other personal income subject to the non-commercial loss rules, which set income and activity tests.

The trade-off is unlimited personal liability. If the business cannot pay its debts, leases or legal claims, creditors can pursue your personal assets. Some suppliers, customers and lenders also prefer a company structure for larger contracts, raising equity is harder, and as profits grow personal marginal rates may exceed the company tax rate.

Your ABN identifies the business to customers and suppliers; your TFN is for your personal tax return, where business profit is added to your other income and taxed at your marginal rates. You must register for GST once your GST turnover reaches the ATO threshold. Once registered you add GST to taxable sales, claim credits for GST paid on business purchases, and lodge a BAS monthly or quarterly.

The BAS reports GST, PAYG withholding and instalments; it does not replace your annual tax return. If you employ staff you withhold PAYG from wages, report through Single Touch Payroll and pay the Superannuation Guarantee for eligible employees, although you are not required to pay super to yourself. Keep invoices, receipts and bank statements for at least five years, and keep business and personal bank accounts separate.

Setting up is quick: check the licences and permits your trade needs, apply for an ABN through the Australian Business Register, register a business name with ASIC if you need one, open a business bank account and arrange insurance such as public liability, professional indemnity and workers' compensation if you employ staff. Put cloud accounting in place early for invoicing, GST and BAS, and register for PAYG withholding before you hire.

Because your personal assets are exposed, insurance is your main protection layer alongside clear contracts. Talk to an accountant about moving to a company or trust when profits grow, a customer or contract requires limited liability, you want to raise capital or take on investors, you are hiring many employees, or you want to split income among family members or partners.