What are the legalities of setting up as a sole trader?
I’m deciding on my business structure and I think sole trader is best suited. But I’m wondering – does this involve a lot of compliance work?
The legal questions around appropriate business structure have been addressed recently on StartupSmart, so I won’t go over that again here.
The simple answer to your question is – no, there is not a lot of compliance work driven by setting up as a sole trader.
The thing with this form of structure is that you are the business, and the business is you.
Therefore, when you do your normal tax return at the end of the year, as well as any income you may have received from PAYG activities working for someone else, you also include your income from the business you are running as a sole trader.
Similarly, as well as any deductible expenses relating to your PAYG work (e.g. uniforms, etc.), you can also claim all of your legitimate business expenses.
This is where the discipline comes in – you need to be careful with your record keeping so that, if the tax man comes knocking, you are able to clearly demonstrate the difference between expenses you incur in your everyday personal life, from those which you incur in your life as a person running the business.
To do this, I would highly recommend you have a separate bank account and separate credit card so that you can easily maintain and prove this distinction - and not only will your accountant appreciate it. It should result in your accounting fees being lower as well.
I did say I would leave out the legal reason behind different structures, but I cannot finish without a quick warning – if you own assets in your own name (like the family house), you need to be careful when using a sole trader structure if the nature of your work could lead to either large business debts or the potential to be sued by someone over the work that you do.
This is because adopting a sole trader structure puts all your personal assets on the line.