Operating as a Sole Trader is a great way to get your business started quickly and cheaply. Trading under your own name requires little administration and usually involves minimal overhead costs – though that depends on your industry.
But once you pick up speed, you can start to run into a few problems. We’ll break down some of the key challenges that sole traders face when they reach a growth stage – and when it might be time to incorporate.
It’s not tax-effective on a high income.
Sole traders are taxed on their earnings at the individual rate. So, when you’re making less than $45,000 a year, you’re pretty much on the same footing as everyone else. But once you get above that, you’re paying $5,902 plus 32.5c for every dollar earned above $45k – that’s 5c more per dollar than 2020-21’s flat corporate rate of 27.5%, which is set to drop to 25% in the 2021-22 financial year.
Once you get above $120,000 a year, the individual rate rises sharply to $29,467, plus 37c of every dollar over $120k. And because you’re self-employed, you’ll be responsible for managing your tax obligations yourself – there’s no employer to keep on top of it for you.
At this stage, you’re better off incorporating as a company to take advantage of the flat-rate 25% company tax (based on 2021-22 rates. There might be higher running costs – but it’ll be more than worth it in the long run if you’ve got the capital to do it now.
You need to hire staff to help you out.
If you’re starting to pick up more and more clients, you may eventually find yourself at a point where you’ve got no more hours left in your day. This is usually when Sole Traders might employ a couple of people to help things run more efficiently – but the decision to hire employees comes with a lot of new responsibilities.
You’ll be responsible for paying their wage and their super, and you’ll likely have to take out both workplace compensation cover & public liability insurance. If you miss any of your legal obligations, you can get smacked with heavy fines. Because you’re personally liable for any debts incurred as a sole trader, you can wind up in hot water fast.
Of course, if you incorporate as a company, you’ll still have to look after your staff. But it’s easier & cheaper to do, there’s more support available, and your personal assets aren’t at stake if you mess up.
It can hurt your brand.
A lot of companies or agencies simply won’t deal with Sole Traders. If you’re reading this with rising indignation, don’t worry – we know that Sole Traders are generally some of the smartest and most switched-on people in the workplace. After all, you’ve made the choice to go out on your own and get it done. Unfortunately, not all of your potential clients see it that way.
Because it differs from the usual employer-employee structure, it’s common for people to see working with a sole trader as too chaotic or too hard to properly integrate with their business. It could also be that they’ve been burnt by a contractor before, or they feel safer working within the established power structures & hierarchies of traditional employment.
It’s a tough truth, but there can be a perceived lack of prestige around sole trading. Because it’s so easy for anyone to become a sole trader, the level of professionalism can vary greatly. If you’re in a field where prestige really matters – like law or finance – then remaining a sole trader could be holding you back from working with big clients.
It’s high risk. Seriously, your assets are not safe.
This is probably the single biggest drawback to being a sole trader – and it’s one you’ve hopefully heard before. Sole Traders in Australia do not have limited liability protection. Because you’re trading under your own name, you and your business are not separate entities, and you’re personally liable for any business debts you incur.
This means that if you get sued as a sole trader or fall foul of the ATO, you could lose everything. All of your personal assets – your car, your house, your money – are at risk. There are a few ways to protect yourself from this. If you have a spouse or a de-facto partner, make sure your home is in their name. You could also look into setting up a family trust. It’s all about organising your assets into different buckets.
If trusts aren’t your thing, then the most effective way to protect your personal assets from becoming collateral damage is to incorporate as a company. This will affirm your business as a separate legal entity to yourself. You’ll still need to pay any business debts you rack up, but only from your business account – your personal assets will be much safer.
If you identify with any of the above issues, don’t hesitate to get in touch. We can help you decide if incorporation is the right strategic move for you, and show you the best way to manage it in your industry. If you decide that you do want to incorporate – we’ll help you with the paperwork & make the process easy for you.
Disclaimer: This advice is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider whether this advice is suitable for you and your personal circumstances before acting on it.