A sole proprietorship business revolves around one person. No other parties have an interest in the business. The sole trader is personally liable for all debts. All income earned in the business becomes part of the sole trader’s assessable income.
When it comes to choosing a business structure, income tax should be only one of many considerations.
Most businesses go through several stages. This is more apparent when they are started from scratch, but it can also apply when a business is bought as a going concern. Because of this, the owners of a business have different requirements depending on the stage the business is at.
From an income tax point of view, nothing stops business owners operating through one structure, such as a sole trader, then later changing the structure to one that better meets their needs. The Australian Tax Office will not be able to attack this change as long as the prime reason for changing was not to obtain a tax benefit.
Under income tax law, the ATO can attack anything it can prove was done for predominantly income tax reasons. When it comes to choosing a business structure, income tax should be only one of many considerations. By considering these other factors, the chance of the ATO successfully attacking any change is greatly reduced.
In addition to income tax and capital gains tax, the other important factors that should be considered are protection of personal assets, the set-up cost of the tax structure, legal liability, superannuation and WorkCover.
Operating as a sole trader is the most common structure used when starting a business. When the business is being started part-time, while the owner continues in full-time employment, operating as a sole trader allows the owner to reduce tax payable on the employment income if losses are made. This tax reduction is subject to the business satisfying non-commercial business loss provisions.
This income tax advantage becomes a disadvantage when the business starts to make profits, as the business income will be added to the owner’s employment income. This could mean that tax is paid at the higher tax rate of 40 per cent when the combined income exceeds $75,000 or at 45 per cent if it exceeds $150,000.
Compared with the other business structures, operating as a sole trader is the cheapest option to set up and the easiest to administer.
There can be no set-up costs unless a business name is required. In addition, the only administration system required is an accounting or bookkeeping system that produces a statement showing business revenue and expenses, and the profit or loss.
Legal liability and protection of personal assets are two areas where operating as a sole trader is a major disadvantage. In the event of a legal claim against the business, where insurance does not cover the full extent of any damages awarded, the owner’s personal assets can be attacked to pay the damages.
This should only be regarded as a major consideration where the business has a high level of operational risk. An example would be a tree-felling business. In the event of a tree falling the wrong way and destroying a house, the cost of rebuilding the house could force the owner of the tree-felling business to sell his home to meet the liability.
Another risk can arise where a business incurs large debts to suppliers and then fails. Operating as a sole trader means suppliers can attack the owner’s personal assets to meet any shortfall the business owes. One way a sole trader can protect against this, if he or she is married, is to have all assets owned by the spouse.
As people cannot employ themselves, a sole trader is not required to pay WorkCover on earnings from the business.
However, this also means that if an accident occurs the sole trader will not receive WorkCover benefits. To protect himself or herself, anyone operating as a sole trader should take out sickness and accident insurance.
The final consideration of capital gains tax is not a major issue for a sole trader.
Due to the general 50 per cent capital gains tax exemption available to individual taxpayers, and after applying the 50 per cent active assets exemption available to qualifying small business owners, only 25 per cent of a capital gain on the sale of a business is assessable.
Fast and easy Alberta Sole Proprietorship Online Registration. Company Formations Canada simplifies to the maximum the task of registering a new sole proprietorship business name in Alberta, by offering an easy on-line sole proprietorship registration service.
Sole proprietorships are registered in Alberta, according to the provisions of the Alberta Partnership Act. Registration is completed by Filing a Statement of Registration Sole Proprietorship with the Alberta Registries Office.