If you’re thinking of setting up a business as a sole trader, it is important that you understand the benefits and risks involved and the process by which you can legally register and operate your business. Here’s everything you need to know about being a sole trader.
What is a Sole Trader?
A sole trader is regarded as one of the simplest forms of companies to establish. To operate lawfully, you must get the necessary permissions and licences, and you are personally accountable for any debts, litigation, or taxes that your firm incurs. However, the process of establishing a sole tradership in itself is relatively straightforward and hassle free.
Becoming a Sole Trader
Many entrepreneurs choose to become sole traders because of the control they have over business choices and earnings, as well as the ease and cost-effectiveness with which the business itself can be established.
However, sole proprietors are exposed to significant risks. For instance, increased personal liability, difficulties acquiring money, and a perceived lack of expertise are just a few of the issues a sole trader may encounter.
In this article, we present an overview of how you can get started as a sole trader.
Beginning your Adventure as a Sole Trader
As a sole trader, you can run a wide range of companies. Because they’re free and simple to set up, many people utilise sole traders to convert their side hustles into something more serious – and often very successful. Here are some examples of areas in which people set up sole tradership.
Examples of Sole Traders
- Daycare provider
- Freelance graphic designer
- Fitness teacher
- Freelance writers
- Direct salesperson
- Accountant/Tax Preparer
- IT expert
- Financial advisor
- Home health aide
- Virtual assistant
- Event coordinator
A Step-by-step Guide to Becoming a Sole Trader
Step 1: Determine whether or not a sole proprietorship is appropriate for you
If you establish a business as a sole trader, you will have total control over your business’s income and operations. However, on the other hand, you will also be personally liable for all debts, litigation, and taxes incurred by the firm. If your company is sued, personal assets such as your house, credit rating, and money are not protected.
Establishing an appropriate business structure is critical to the success of your company. It will impact everything from day-to-day operations, to taxes, to how much of your personal assets are at stake.
You can organise your business in a variety of ways, including sole tradership, partnerships, corporations, and trusts.
Advantages of Being a Sole Trader
- Full decision-making authority
- Simple to set up (No state registry necessary)
- Cost-effective to set up
- Simple tax filing
- Low tax rates
- Balance sheets are not needed by the IRS
- Total revenue control
Disadvantages of Being a Sole Trader
- Personal assets may be at risk
- Personal responsibility for litigation increases
- Personal bankruptcy is synonymous with business bankruptcy
- Difficulty securing capital
- Self-employment tax
- Many banks need firms to be incorporated before they are willing to lend them money
- Potential customers may not perceive your business to be professional
Step 2: Contact a small business specialist in your area
Before you move full steam ahead and establish yourself as a sole trader, get in touch with a local small business specialist to learn the processes necessary for you to lawfully conduct your affairs.
Step 3: Pick a Name
The fun part of starting a new business is coming up with a name; the tough part is determining whether or not it’s already used and trademarked. Check the ASIC to see whether your selected name has already been trademarked. If it hasn’t already, try submitting your name with the Business Registration Service to ensure that no one steals your name!
Step 4: Register your Business Name
As a sole proprietor, the legally recognised name of your business is your own name. However, if you intend to operate under a different name, say, Gary’s Great Gardening, you must register Gary’s Great Gardening as the trading name.
Step 5: Get a Domain Name
Now that you’ve found the right name, it’s time to look for a domain name. To ensure the opyimal client experience, you should ensure that your domain name is the same as the business name you have chosen for your firm
Step 6: Check For Any Other Permissions or Licences That May Be Required
The penalties for not having the proper licence or permission may be catastrophic for a new firm. Check here to see whether you require anything and make sure you have the required paperwork in place. For instance, you may need a health department authorisation for preparing and serving meals or a registered status to start childcare offerings.
Step 6: Open a Company Bank Account
When running a business as a sole trader, it is critical to keep personal and business spending distinct. Setting up a business bank account ensures a certain amount of safety for your business cash, allowing consumers to pay with a credit card and write cheques payable to your firm, and helps your business to build a high credit score.
Step 7: Purchase all the Insurance You Need
Because one of the most significant dangers of beginning a single tradership is the liability it imposes on the owner, appropriate insurance is a requirement.
Consider property and liability insurance, vehicle insurance, health insurance, and disability insurance, at the very least. However, make sure you research all the insurance requirements that may be relevant to your distinct business. While insurance can be costly, it protects you and your personal assets against potential litigation and professional setbacks. You can learn more about sole traders insurance here: Sole traders insurance
Step 8: Pay your Taxes
As a single proprietor, you must pay income tax on any profits made by your firm. Remember that because you are self-employed, your business income is not subject to appropriate withholding when you are paid. It will be your responsibility to ensure you meet all tax obligations.
To avoid a tax shock, set aside money from each payment to meet potential tax liabilities.