Sole Traders and Partnerships

What is a Sole Trader?

Compared with the other business structures, operating as a Sole Trader is the cheapest option to set up and the easiest to administer.

A Sole Trader is a business operating body where the business decisions are generally being made by one person (usually the owner). However, this does not mean that there is only one person in the business who carries out all the work and responsibilities associated with the business. Like any business, a Sole Trader is able to employ others to carry out daily tasks and duties to ensure the business is able to supply its customers with services or products.

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. An example by which a sole trader can protect against this, is if he or she is married, and all personal assets were owned by the spouse who is not formally involved with the business.

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.

We would recommend speaking with your Accountant or advisor to understand the restrictions placed on a Sole Trader. You could also do some of your own research by reading the Australian Taxation Office "Tax Basics for Small Business".

What is a Partnership?

Two individuals operating or carrying on business with the common view to make a profit is called a Partnership. 

A partnership is not a legal entity. The partners are liable for the debt of the partnership.

Similar to the Sole Trader, the owners of the Partnership are totally responsible for covering the full extent of  the business debt.

Partnerships can be agreed upon verbally or in writing. However, It would be prudent to establish a "Partnership Agreement" between the parties entering into the partnership. The agreement should outline the rules and responsibilities of each of the business partners and determine ownership of the business. For example, one partner may come up with the business concept while the other parter provides the initial capital to start the business. This would seem reasonable grounds for splitting the ownership 50/50 however in some cases the ownership may be split 70/30.

Another critical detail of the Partnership Agreement is the establishment of a time frame in which the partners decide to work together. 

The relationship can be for a fixed term or indefinite if both partners agree. However, in the event of retirement, death or bankruptcy of a partner, the partnership automatically dissolves.

Finally, should one of the partners wish to sell their interest in the Partnership, consent from all partners is required to make the transfer to another party.

If you would like more information about Partnerships please email us.