Business Structure in Term of Law - Sole Trader - Essay Example

SOLE TRADER By Name Course Instructor Institution City/State Date Business Structure in Term of Law – Sole Trader Introduction A sole trader can be described as a person running a business. This type of business structure is not only considered cheapest but also simplest. When a people are operating their business as sole traders, they become the only owner and they manage and control the business. They are legally responsible for every aspect of the business and they cannot share losses and debts with other individuals. Still, they are allowed to employ workers in their business, but they cannot employ themselves. As a sole trader, it is the responsibility of the owner to pay the workers’ super. Sole trader structure is considered beneficial because it is easy to set up and operate, the owner retains effective control of the business, and the reporting requirements are minimal. Besides that, the rate of income tax rate is the same as the owner’s personal tax rate; thus, it enables the business owner to take tax advantage of tax losses that are offset against their other incomes. Given that the sole trader is not the employee of his/her business, no obligatory superannuation contributions are not made. In addition, the sole trader does not have workers' compensation or pay payroll tax. Still, there are some shortcomings associated with sole trader; for instance, the income cannot be split amongst the family members and for that reason, the tax planning opportunity is limited. Furthermore, a sole trader has unlimited liability; that is to say, all his/her personal assets are vulnerable in case the business fails. This part focuses on the sole trader based on law and the relevant regulations. Discussion As mentioned by Youn (2012), a Sole Trader is an individual who owns as well as runs a business by him/herself. All the business’s property, like office equipment, stock and leases are owned by the owner. A sole trader has numerous consequences; for instance, the business is the personal income of the owner and the business owner is held accountable for all liabilities of the business. Furthermore, the business creditors are allowed to settle the liabilities using the personal assets of the owner. In addition, when the dealing with a sole trader business, all deals should be carried out by the owner and he/she is also responsible for unlawful activity associated with the business. Still, being a sole trader comes with some advantages; for instance, all the business’ property, obligations and rights are in the owner’s name; therefore, the need for handling other legal arrangements is eliminated. For that reason, the sole trader is easier and simpler as compared to other business forms. Besides that, business maintenance is easier and there is no need for administrative tasks, like returns lodgement, annual meetings, or implementing resolutions. According to Youn (2012), the legal disclosure regulations related to a sole trader mean are minimal; therefore, the business owner is offered greatest privacy. Given that all business assets are owned by the owner, they also get all the business profits. The need for sharing profits is eliminated; therefore, the owner can utilise the profits for other activities such as business expansion. Still, the sole trader is associated with a number of disadvantages; for instance, the sole trader is responsible for every business obligation. During insolvency, the sole trader is required to cover the deficit using their personal funding. Besides that, a sole trader cannot provide shareholdings to other individuals; therefore, utilising personal assets or borrowing debts is the only way a sole trader can raise capital. Given that the business is the owner and vice versa, both commercially and legally, it becomes exceedingly challenging to sell the business in case the owner decides to get out or in the event of his death. In Australia, the sole trader taxation is his/her marginal tax rate (Youn, 2012). When the sole trader’s income is more than $180,000, his/her tax will be the 45% in addition to Medicare levy of 1.5%, which is highest marginal tax rate. According to Youn (2012), operating losses could be utilised to offset the sole trader’s other incomes, but when the income is sourced from various business activities, they sole trader must adhere to the loss quarantining rules which are applicable to the losses from business activities that are non-commercial. As pointed out by ATO (2016), the sole traders utilise their individual tax file number in order to lodge a tax return. The sole trader should apply for Australian Business Number (ABN) as well as utilise the ABN for all their business dealings. Besides that, the sole trader should register for Goods and Services Tax (GST) in case their annual GST turnover is more than $75,000. The sole traders are required to set aside some money for paying the income tax, which they can pay quarterly in instalments, Pay As You Go (PAYG) (ATO, 2016). A sole trader can trade using his/her own names; thus, there is no need for registering a different business name. Legally, there is no different between the business and as the owner. Akin to other businesses, sole traders are legally allowed to employ workers, but unlimited liability put the sole trader at risk of losing all his personal properties. There are some key factors that people seeking to set up sole trader should consider; the business name is one of the most important factors since the sole traders are not required to register their business name if they are utilising their own personal name. More importantly, registering their business name does not offer them legal protection or ownership of the name. However, through trade marking, the sole trader can legally protect their name and protect others persons from trading using that name. When a sole trader is operating under a different name for their own names, they have to register the name under the Business Names Registration Act 2011. In Australia, Australian Securities and Investments Commission (ASIC) is tasked with administering all business names. Another factor that a person should consider tax registrations; in this case, Tax File Number (TFN) is an important feature of the sole trader business since the owners can utilise their individual TFN to lodge their income tax return. Australian Business Number (ABN) is another crucial factor; it is an eleven digit identifier for all the business dealing between the business owner and the tax office as well as for dealings with other governmental agencies or departments. All sole traders need an ABN in order to steer clear of having their money withheld considering that the business clients are legally required to hold back 46.5 per cent of all payments made to the sole trader if an ABN is not quoted. As mentioned by Business Victoria (2016), for a sole trader to collect GST, he/she must have an ABN. When applying for the ABN using the Australian Business Register (ABR), the sole traders are required to indicate if they want to register their business under the business structure of sole trader. Business Victoria (2016) emphasises that sole traders working as employees or are earning payment under the labour hire arrangement, as an office holder, or company director, cannot be given an ABN. The third factor is GST, which is a consumption tax levied at 10% rate on the supply of nearly all the goods as well as services that Australians consume. A sole trader expecting an annual turnover is $75,000 or more is required to register for GST. All sole traders are responsible for their individual superannuation arrangements. They can claim a deduction for all their individual super contributions they make. Business Victoria (2016) posit that bBefore the sole trader claim a deduction, they must notify their intention fund to claim the money as a deduction as well as wait until it is confirmed by the fund that the deduction can be claimed. Upon receiving the confirmation, the sole traders can claim the super as their tax returns’ personal deduction. If the sole traders employ people, they become responsible for employee’s PAYG as well as payroll tax (which includes paying and reporting tax on fringe benefits) as well as eligible employees’ superannuation payments. In the sole trader business structure, SMH (2007) posits that income tax advantage could turn out to be a disadvantage if the sole trader starts making profits, given that the business income is normally added to the employment income of the owner. The protection and legal liability of sole trader’s personal assets is a key disadvantage considering that in the case of a legal claim against proprietor, where there is no insurance cover, the personal assets of the owner could be seized in order to pay the damages. Sole trader business has high operational risk; for instance, if a tree falls onto the business and destroy the house, the cost related to the reconstruction of the house would be catered by the business owner. Besides that, the sole traders could face a serious risk if their business fails while the owner owes the suppliers a huge amount of money. Therefore, the suppliers could seize the sole traders’ personal assets to meet all the shortfalls the business owes. However, the sole traders can protect themselves against this, if they are married, by transferring the ownership of their assets to their spouses. Given that sole traders cannot employ themselves, they are legally exempted from paying WorkCover using their business’s earnings. In a case of an accident, however, the sole traders would not get WorkCover benefits. Therefore taking out accident and sickness insurance is the only way the sole traders can protect themselves. As mentioned by Latta (2010), sole traders normally use their personal assets, normally the family home as security while taking loans. Besides that, sole traders are legally allowed to carry forward tax losses into the future years. Consumers who transact business with sole traders are protected under different legislations like Victoria’s Fair Trading Act. In a case of insolvency, the creditors' rights have been enshrined in the Bankruptcy Act and the Insolvency and Trustee Service Australia (ITSA) is the organisation tasked with this issue. The sole traders do not have right to ‘perpetual succession’. Rather, the business assets are listed under the estate plan of the trader (Latta, 2010) Conclusion In this section, the focus was on the sole trader based on law and the relevant regulations. As mentioned above, the sole trader is the simplest legal structure through which a person can run a business in Australia. The sole traders normally manage and operate their business under their names. The Sole trader structure is considered beneficial because it is fairly cheaper to set up and needs less maintenance. The sole traders are legally responsible for every aspect of their business. They make all decisions regarding the business and are allowed to employ staff people. References ATO, 2016. Sole trader. [Online] Available at: HYPERLINK "https://www.ato.gov.au/business/starting-your-own-business/before-you-get-started/choosing-your-business-structure/sole-trader/" https://www.ato.gov.au/business/starting-your-own-business/before-you-get-started/choosing-your-business-structure/sole-trader/ [Accessed 8 May 2017]. Business Victoria, B., 2016. Sole trader. [Online] Available at: HYPERLINK "http://www.business.vic.gov.au/setting-up-a-business/business-structure/sole-trader" http://www.business.vic.gov.au/setting-up-a-business/business-structure/sole-trader [Accessed 8 May 2017]. Latta, K., 2010. Companies vs Sole Traders: Things you need to consider. [Online] Available at: HYPERLINK "https://www.cleardocs.com/clearlaw/business-structuring/companies-vs-sole-traders.html" https://www.cleardocs.com/clearlaw/business-structuring/companies-vs-sole-traders.html [Accessed 8 May 2017]. SMH, 2007. Advantages and disadvantages of operating as a sole trader. [Online] Available at: HYPERLINK "http://www.smh.com.au/small-business/advantages-and-disadvantages-of-operating-as-a-sole-trader-20090619-cpvm.html" http://www.smh.com.au/small-business/advantages-and-disadvantages-of-operating-as-a-sole-trader-20090619-cpvm.html [Accessed 8 May 2017]. Youn, B., 2012. Successful Business Running in Australia: A Comprehensive and Practical Business Guide to help increase value and sustainable growth. 1st ed. Sydney NSW: Quantum Business House. Read More