Starting a business can be an exciting time but understanding the cost and accounting work involved can leave us stressed and confused.
This week’s edition is dedicated for all those venturing out on their own and willing to take a leap of faith! For all you sub-contractors out there, I haven’t forgotten about you either, the information below will help shape both scenarios and lead you to understand more about how running your income and expenses as a sole trader will affect you tax-wise.
TIME & SETUP COSTS
Setting up an Australian Business Number (ABN) is the only requirement needed from the Australian Taxation Office (ATO). This allows the ATO to identify you as someone who runs their own business under their personal name or works for another entity as a subcontractor. ABN’s can be set up quickly and is free if you understand how to apply for one yourself through the Australian Business Register (ABR). Otherwise, this can cost as little as $100 per application through your accountant or other external parties.
LEGAL OWNERSHIP & LIABILITY
All assets purchased for the business or for the purpose of working as a subcontractor are owned solely by you. This gives you control in operating and controlling the rights of the asset.
One major downfall in running a business as a sole trader or working as a sub-contractor is that you have UNLIMITED liability. This means that if anything were to go wrong in your business, all assets including personal and business assets are at risk equally. You as a sole trader hold complete responsibility for all aspects of the business including management of its debts. This reason alone is why many businesses that continue to operate, structure themselves outside of a sole trader entity into other entity structures which provide LIMITED liability.
The more assets and liabilities you control and manage within your individual name bears more weight and damage if things were to go wrong. Asset protection must be carefully considered in order to safeguard yourself from potential business mishaps or lawsuits. This also includes owning more than one investment property. Please speak to your trusted accountant and lawyer in order to discuss your options.
Although running a sole trading business can help you save both time and money in regard to the initial setup, many sole traders find themselves paying higher marginal tax rates than those who structure themselves into other entities.
Sole traders are subject to a maximum of 47c per dollar at the highest marginal tax bracket. This profit is also combined towards any other income earned in your individual name and pooled together in consideration of how much tax is owed to the ATO.
Unlike employees, there isn’t any boss paying you wages and taxes. This means that you are solely responsible for paying your own portions of tax back to the ATO at tax time. In many cases, sole traders find themselves owing a large amount to the ATO at the end of the year and struggle to make these payments back due to poor cash flow planning.
In contrast, if your business makes a loss, these losses may be allowed to offset any salary/wage income you earn during the financial year. However, strict rules apply in order to use these losses. Please speak to your trusted accountant to advise you of your personal circumstances in order to assist you in maximising and protecting your financial position each year.
Steven Wong Accountants
Accounting for Growth