SOLE TRADERS AND PROPRIETORSHIPS
Sole Trader /Proprietorship as a Trading Structure
“Sole trader/proprietorship” as a business structure consists of one person owning both legally and beneficially the assets of the business or venture generating the income. Sole trader/ proprietorship is obviously the simplest of business structures, and for many businesses this structure represents the most efficient and “tax effective” manner in which to conduct their affairs.
As sole trader/proprietorship is viewed as an “individual” for taxation purposes:
- Income and gains associated with the business may be grouped and offset against losses from other activities (bearing in mind that capital losses may not be offset against revenue income, even at the individual level)
- Revenue and capital losses may be carried forward indefinitely, without the need to satisfy any additional tests (such as the “same business test” applying to companies)
- The individual will qualify for the “50% CGT discount” on capital gains made on capital assets held for more than 12 months
- The individual may qualify for the various CGT small business concessions in respect of his or her “active assets”. Furthermore, there is no risk that part or all of the benefit of any of the CGT small business concessions will be recaptured as a result of being distributed to the individual through an intermediate business structure (as may be the case in relation to companies and unit trusts).
Sole proprietorship has the additional benefit of being very simple to administer. Only a single tax return is required, disclosing both the individual’s “personal” and “business” income tax affairs (although various supplementary schedules will generally need to be completed).
There are no mandatory reporting obligations to bodies such as the Australian Securities & Investments Commission (ASIC), nor state Corporate and Business Affairs Offices (unless the individual has a registered business name or requires one or more licences issued by a State or Federal authority).
These comments should not be read as implying that a “sole proprietor” may not be conducting a complex business. However, sole proprietorship remains relatively free from “administrative overhead” when compared to other business structure options.
Unfavourable aspects of an individual trading as a sole proprietor.
- A significant drawback from carrying on a business as a sole proprietor is that the businessperson is exposed in an unlimited way to the risks associated with carrying on the business. Moreover, any personal or investment assets (such as the family home) that are held directly by the individual are also exposed in an unlimited way to those same business risks. Exposure to these risks can hamper the taking of calculated business risks, and therefore stifle otherwise valuable economic activity.
- The individual will be subject to tax on the business income at their personal marginal rate.
- A sole proprietor may have reporting and general ethical obligations to certain government, professional or trade bodies.
- An individual carrying on business as a sole proprietor should ensure that they do not also hold their investment assets directly, i.e. that their investment assets are held through an investment structure that provides at least some degree of “asset protection” against their personal business risks. In this regard, one of the simplest forms of an investment asset protection structure is the “complying superannuation fund”.
Forsyths has extensive experience in small business and should be consulted to assist with enabling business to be correctly established.Partnership Company Trust Income Tax Business Ladder