How to become a sole trader?

The sole proprietorship is the simplest kind of business organisation, and its establishment is not particularly difficult or expensive. You will be legally accountable for all parts of the firm if you choose to operate as a sole proprietor.

You will be responsible for making all of the decisions regarding the beginning and operation of your business, and you will have the ability to hire employees.

Establishing a firm as a sole proprietorship is the least complicated and most affordable business structure option. Although you "trade" on your own, you are still able to employ individuals to work for you in your business because it is under your control and management.

What exactly is a sole proprietorship?

A person who runs their own firm on their own is called a sole trader. It is the simplest and least expensive form for a firm.

If you run your company as a sole proprietorship, you are the only owner, and you are also in charge of running and managing the company.

You are held legally responsible for anything that goes on in the company. It is not possible to transfer one person's debts or losses to another person.

Your company may hire staff members, but you are not eligible for employment there yourself.

Since you are a sole proprietor, you are the one who is responsible for paying the employees' pension and benefits. You are also responsible for your own super, which you may choose to pay into a fund for yourself as a means of contributing to your retirement savings.

If you're a sole trader, you are:

• one and only proprietor of the company
• accountable from a legal standpoint for all parts of the firm, including the debts.

You are permitted to hire other employees, but you are not permitted to hire yourself.

If you operate your business as a lone proprietor, you are accountable for your own retirement benefits in addition to those of any additional employees you may have.

In the event that you have been hired to carry out certain activities in the capacity of an employee, you will not be eligible to get an ABN for those activities.

Characteristics of a sole proprietor

You as a sole proprietor:

• When you submit your income tax return, you will need to use your individual tax filing number.
• Include all of your income on your individual tax return, and use the area designated for business expenses and income to detail your company's financial dealings (there is no separate business tax return for sole traders)
• Apply for an Australian Business Number (ABN) and make sure to utilise it in all of your commercial transactions.
• If your annual GST turnover is $75,000 or more, you are required to register for the Goods and Services Tax (GST).
• If you are a small business owner and you pay taxes at the same rates as individual taxpayers, you might be eligible for a tax credit for small businesses.
• Put some money aside each month to cover the cost of your income tax bill at the end of the year; typically, this is accomplished by making quarterly payments under the Pay As You Go (PAYG) system.
• You are entitled to a deduction for any personal payments to your superannuation fund that you make after notifying your fund.
• You are not permitted to make tax deduction claims for any money that is "drawn" from your single proprietorship business. Even if you consider the amounts you take out of the company to be wages, the Internal Revenue Service does not consider these amounts to be wages.

Personal services income (PSI)

You may be getting personal services income (PSI) if the majority of the payment you receive is for your own personal efforts, abilities, or experience. If this is the case, you may be required to handle deductions related to this income in a different manner.

Why operate as a sole proprietor?

People who are interested in beginning a small business should strongly consider becoming registered as a sole trader. In contrast to the majority of other business structures, this one can be established for the lowest possible cost and with the fewest number of hassles.

A person who intends to operate and run a firm by themselves is an ideal candidate to take on the role of a lone trader.

Because you are able to include all of your business expenses and outgoings in your personal tax return, you will not be required to file separate tax returns on behalf of your firm.

For individuals and families aiming for a secure financial future, the insights and strategies provided by a skilled financial planner can be invaluable

What must you do to set yourself up as a sole proprietor?

In a nutshell, all that is required of you is to register as a sole proprietor and then begin to work. But that's not all there is to it if you want to launch your company with solid foundations and a well-thought-out plan; you'll need to consider a few other factors as well.

Carry out some study

If you decide to go into business for yourself without first conducting any study, you might as well just shoot yourself in the foot.

The world of business is not always easy or forgiving, but it can be. Please don't take this the wrong way, but there is a possibility that the brilliant thought you just had is neither brilliant nor innovative.

Additionally, there is a possibility that the market for the services or products you intend to provide may not be substantial enough or that you will face intense competition.

Naturally, it is disheartening to find out that other people are already covering your dream idea or that there simply aren't enough clients to produce a respectable revenue for you over the long run.

If you find out these information before you begin your firm, however, it will be a beneficial and significant discovery for you.

Continuing on with your business despite the fact that it is not profitable is the worst thing you could possibly do for both your mental health and your financial situation.

Therefore, before you go on to anything else, you should get serious about conducting market research, and you shouldn't gloss over any unfavourable findings or criticism.

Hints for research:

• To get the ball rolling, you should begin by soliciting feedback on your concept from close relatives and friends. Have some samples or a working example of the service that you will be providing for them, so that they can get an accurate picture of what your firm is all about. Do they have any experience working with businesses that are comparable to your concept? What are their thoughts on them? Pay close attention to both the positive and negative aspects. As a result of this, you will be better equipped to make informed judgments as you move forwards.
• Do some research on your rivals and any other companies that offer services or products that are conceptually analogous to your own. Find out as much as you can about them both online and in person so that you can have a clear understanding of how they conduct business and how they communicate with their target audience. You should determine what it is that you can perform that is superior to what they are doing by conducting this investigation. Why should consumers choose to do business with you rather than with your rivals? You have a problem on your hands if you don't have a response to this question!
• Find out who your ideal customers are and evaluate whether or not the data indicate that your enterprise has a chance of succeeding. Can a sufficient number of your ideal clients quickly reach your establishment, and if so, where are they located? How do you plan to communicate with your existing and potential customers? Find out which method the people who make up your target demographic like to use most to gather information about businesses.

Three really interesting posts on that topic can be found here:

• How to Market to Millennials, Generation X, and Boomers: A Generational Approach to Advertising
• What are the keys to success when it comes to marketing to Generation Y?
• Marketing advice for members of Generation Z

If you require equipment or technical assistance, you will need to find suppliers and evaluate the terms, pricing, and practicality of leases and services. If you need equipment, you will also need to find suppliers. Seek out referrals, and make certain that you select the optimal option for your company out of those that don't require you to make long-term commitments. In one year, you can have a very different opinion on what's best for your company and how it should be run.

Once you get started with your research, you'll realise that you're on an interesting learning curve almost immediately. The more you educate yourself, the more self-assured and well-prepared you will feel. It is likely that, as a result of your new learning and information, you will modify your course of action or implement new ideas in order to make your company more powerful and better 'fit' the requirements and expectations of your clientele.

Develop a strategy for your business

When you wish to start your own firm as a sole trader and begin doing business for yourself, everyone you approach for backing, investment, or contributions will require a copy of your business plan that supports the idea you have.

Your business plan must state what your firm will do, the objectives you have set for it, how it will reach those goals, how it will be funded, and when you expect it to make a revenue from its operations.

Your business plan must to include the following elements:

• The introduction will cover the company's profile
• Vision: the end goal or purpose of the company
• Who are the customers, exactly?
• Possibility: How and if it will succeed.
• Time frames and targets - When will each step begin, and how long will it be until you start making a profit?
• Production equipment, automobiles etc. – What do you anticipate needing?
• How would you attract clients to your door or website using your marketing strategy?
• How would you finance it? What investments will you make?

It is important to realise that a business plan is not only a tool to assist you in getting your company off the ground and operating in the right direction; rather, it is a very helpful instrument that will assist you through the many stages of running a small business.

Tax and business registrations

While you go into business for yourself as a single proprietor, your tax responsibilities will be different from those you had when you were a worker. The good news is that you can deduct some of the costs associated with running your business from your tax return.

To begin, it is necessary for you to:

Create a unique identifier for your company by registering for an Australian Business Number, or ABN.

If you anticipate that your company will have a gross profit of $75,000 or more in its first year of operation or more, you are required to register for the Goods and Services Tax (GST). Note: If you want to operate in the ride-sharing industry, you are required to register for GST as soon as possible, regardless of the amount of money you expect to make.

In our piece titled "ATO crackdown on ride-sharing drivers," you may find more information about the appropriate and inappropriate behaviours for drivers of ride-sharing services.

Business Name

Check its registration as a brand, business name, and domain name before deciding on a name for your company (your website address). If someone else has already registered the name as a brand in Australia in a class that is relevant to your business, it would be in your best interest to select a different name for your company. If you file the name as a brand in the applicable classes, you may acquire exclusive rights to use that name in those classes as a result of your registration. If you register simply under a business name, company name, or domain name, you won't get the same type of exclusive rights as if you register under your actual name.

When you operate as a single proprietor, you are eligible to claim a wide variety of tax deductions relating to your firm, as was previously indicated. Nevertheless, you should be sure to meticulously record ALL of your earnings and expenditures.

Income:

• Wages and salaries from any and all sources of income
• Investments
• Dividends
• Managed assets
• Allowances
• Rental income from properties
• Earnings from renting out a room

Business Expenditures: Supplies and office costs

• Setup fees for utilities like power and phone, if applicable.
• Equipment and tools: purchase, rental, or repairs
• Costs of a tablet, PC, and phone
• Computer hardware and software for the workplace
• business-related machinery, upkeep, and repairs
• Home or business office costs (as applicable)
• Shelving units and filing cabinets
• Chairs, desks, and lamps
• Stationary
• Internet expenditures (apportioned)

Clothing and safety equipment

• Merchandise emblazoned with your company's logo
• Items and garb that offer protection (safety glasses, overalls, gloves etc.)
• Laundry and dry cleaning of working attire
• If you work outside, you should always protect your skin with sunscreen and use sunglasses.

Self-education

• Expenses associated to training courses, provided that they are directly related to your present business
• Specialised libraries
• Journals/Manuals

Both travel and lodging

• Vehicle costs, such as parking, tolls, operating costs, gasoline, and miles driven, etc.
• Costs associated with purchasing or leasing a work car or a vehicle partially acquired for company usage
• Travel and/or lodging costs, for instance, if you have to attend a trade show for the stock

Certifications, insurance, etc.

• Union dues
• Insurances
• Licences, permits, and certifications, renewed on a regular basis, as necessary

Marketing and technological costs

• Expenses associated with marketing, such as advertising, design, the creation of a website, printing, etc.
• Designing and fabricating signage, as well as installing it
• IT and computer service companies.

Additional factors to think about before going into business for yourself

Cloud computing technology has made it substantially easier to fulfil the record-keeping and tax obligations of a single trader. This has resulted in a large reduction in the amount of human labour that is necessary.

Software subscriptions from companies such as Xero, MYOB, and Intuit offer user-friendly yet impressively broad online platforms for the purpose of keeping track of the financial aspects of a business, including reporting and the payment of invoices, amongst other things.

If you add Etax Accountant's simplified online tax return to the mix, you will be able to file your annual tax returns in a way that is both quick and easy, and you won't have to worry about trying to keep up with ever-changing tax regulations or complicated calculations. Your company will benefit greatly from having us on board as part of their operations.

Business Locations

If renting a place of business is something you're thinking about doing, make sure you give serious thought to whether or not doing so is truly essential. The rents and any other expenses that are involved with commercial real estate can be highly expensive, and the lease durations are often quite extensive.

When it comes to a sole proprietorship that is just getting off the ground, this is a major time investment. If you are able to work from home or provide a service that may be performed on location, it is recommended that you do not work in a commercial setting. If you are in desperate need of a commercial space, you should investigate the possibility of renting a shared workshop, office, meeting room, retail space, or even a location for weekend markets. If conducting business out of a commercial location is not absolutely necessary for the success of your company, you should steer clear of such locations.

These help you save a large amount of money and time, while still delivering the space and professional image you require for your business.

Insurance

A sole proprietor is the only entity responsible for the debts incurred by the company. The amount of liability is uncapped and extends to cover all of a person's assets, even those held in joint ownership with another individual, such as a home.

In the event that you have an injury while on the job, you will not be eligible for workers' compensation benefits. If you are unable to work as a result of this, you may experience a loss of revenue. However, you may still be obligated to pay any expenses related to your firm, such as the repayment of loans.

You shouldn't undervalue the significance of having insurance. Because you are individually responsible for all of the liabilities of the business when you operate as a sole trader, you need to ensure that you have sufficient insurance to protect yourself, your clients, and your company.

Maintain the flexibility of your company

When you are presented with an opportunity, you should be prepared to immediately change course, rise to the occasion, and act decisively. In the corporate world, maintaining a flexible mindset significantly boosts one's chances of being successful.

Fast businesses get tasks done and continue moving. They complete the necessary steps and put them into practise, then evaluate the outcomes, make adjustments to what they provide and how they operate, and begin the process all over again. A method that is open for adoption constitutes an agile business. And it is a fascinating subject for you to investigate further on your own!

Don't quit your regular work just yet

If you are not immediately swamped with orders that need your undivided attention, it might be a smart idea to keep working while you expand your customer base and business. If you are swamped with orders, however, quitting your job might be the best option. You are able to maintain a consistent income, which relieves some of the stress that you are under in the first stages. It also provides you with some leeway to experiment, so you can try new things without worrying that the occasional failure will ruin your financial situation.

What are the benefits of working as a sole proprietor, as well as the drawbacks?

Benefits

• Simple in both its installation and its operation.
• You continue to exercise full authority over your assets and the decisions made for your company.
• Less stringent criteria for reporting
• Any losses that were incurred as a result of your company activity might be deducted from other income, such as that which you receive from investments or salaries (subject to certain conditions).
• Your individual tax file number (TFN) can be used to lodge tax returns if this option is selected.
• Because you are not recognised a worker of your own firm, you are exempt from paying payroll tax, superannuation, or workers' compensation on the income you receive from the business. This applies even if you draw a salary from the business.
• It is not difficult to make adjustments to the company structure in the event that your company expands or you decide to close down operations.

Drawbacks

• Unlimited liability means that in the event that something goes wrong, all of your personal assets are at stake.
• There is little room for tax planning because you cannot share business earnings or losses with other members of your family, and you are individually responsible for paying tax on all of the money generated by the business.

We strongly suggest that before you embark on your journey as a sole trader, you give some serious consideration to the product or service that you will be selling as well as the audience that will be purchasing it. Always start with the consumer and what they require instead of a service or item that you think is amazing but may not have a market rather than making the typical error of starting a business with a product rather than a customer. This is a common mistake made by new firms.