Got a new business idea for the new year…? Here’s everything you need to know about starting your own business as a sole trader.
Although the sole trader business structure is renowned for being the most straightforward business form, there are a few things to keep in mind to ensure you’re on the right route. Before you put up that ‘open for business’ sign, here are some pointers from a bookkeeper on how to get off to a good start as a sole proprietor.
1. Make certain you have a tax identification number.
Most working-age Australians already have a TFN, but did you know that as a sole trader, you must file your tax returns under your own TFN? As a result, it’s critical to have this on hand and to make sure that all of your current tax returns are updated.
2. Obtain an ABN
Your ABN is your company’s unique identifier. For tax reasons, claiming all company expenditures, and quoting on invoices or other sales papers, you’ll require an Australian Business Number. You may sign up for one right here: https://www.abr.gov.au/business-super-funds-charities/applying-abn
3. Register for GST
This is not something that will impact all sole traders. However, you must register for GST if your profits are expected to exceed $75000 or if you’re launching a taxi or ride-sharing service. If your earnings are less than $75000, you do not need to register for GST. Are you unsure about your expected earnings? You can register at any moment if your earnings reach $75000 during the year.
4. Create a corporate budget as well as a personal budget.
When you’re just starting out, it might be difficult to anticipate your revenue, but knowing how much you need to generate each week/month to keep your business and yourself afloat is critical. Make sure your living expenditures are adjusted to reflect your new revenue. Because your cash flow can fluctuate from month to month as a lone trader, make sure you’re prepared for both the lean and the boom periods.
5. Explore insurance options for your business
All sole traders should look into some form of business insurance, most industries require some form of insurance especially when applying for a shop front. You can look online and compare sole trader insurance to get quotes from a range of providers.
6. Setups for superannuation and tax savings
As a single trader, you are responsible for your own superannuation as well as the superannuation of any other employees you hire. You can no longer rely on your super being automatically deposited into your account as it did while you were employed; you must now actively pay it. It’s also your responsibility to pay your tax requirements; unlike your employee wage, tax isn’t taken automatically from your invoice. As a result, it’s critical that you establish a savings system (whether through separate bank accounts or the use of an offset account) so that you may save and prepare for your tax obligations at the conclusion of the fiscal year. You may save for non-negotiable business expenditures like GST, PAYG, and super payments by keeping your profits separate from your everyday ‘spending’ accounts.
7. Create an invoicing system for yourself.
Most individuals begin with simply a spreadsheet and an invoice template, but having a trackable invoicing system that is easy to maintain and fill in while you’re busy is crucial – you don’t want to lose track of your bills! Using integrated, cloud-based accounting software can also help you stay on top of outstanding bills and follow up on them effectively. A time tracker may also help you understand where you’re spending your time, how you can enhance your productivity, and whether or not you need to adjust your billing procedures.
8. Keep note of all of your income and expenses.
You’re still a business, even if you’re a sole trader, and your accounting procedure should reflect that. It’s critical to keep track of your revenue and spending for cash flow, tax purposes, and company planning. This is frequently when the spreadsheet system fails. All of your sales, invoices, and purchase orders, as well as your costs – including receipts – inventory (if relevant), and business expenses ranging from client entertaining to stationery – must be kept track of. When it comes to tax time, having all of your receipts in a shoebox and a copy of your bank statement won’t cut it. Look into cloud-based accounting software so you can maintain your records and prevent major problems and lost time come June 30.
9. Recognize your limitations (and deductions)
As previously stated, if you make less than $75,000, you are not required to register for (or pay) GST. If you earn more than that amount throughout the course of the year, you must register. You’ll also have to fill out a BAS statement. You do not have to pay tax if your income is less than $18,200. As a result, it’s critical to keep track of your earnings and recognize when you’re approaching the barrier. It’s the same with deductions: if you use your car or phone for both personal and professional purposes, you’ll need to know what proportion you use for the latter so you can claim it accurately. The same may be said for a home office. There are deductions for items like depreciation of furniture and payments to a retirement plan, maintenance costs of machinery, tools, or premises, and even ways to help you with bad debts or unpaid invoices. In short, there are several deductions available to sole traders, but they must be directly related to their firm. If it’s all making your head spin, go to your accountant about your position; they’ll be able to tell you what deductions you’re eligible for.
10. Recognize tax advantages and offsets
There are several incentives available to sole traders, and it’s critical to be aware of them so you don’t lose money.
For sole traders, for example, super payments are a tax deduction, so any voluntary contributions you make during the year (up to the legal maximum) are deducted from your income at the end of the financial year. As a result, you pay less income tax while still saving for your future — a win-win situation in anyone’s book!
You also pay individual income tax, so you can be qualified for the small company tax offset, which can save you up to $1,000 each year.
There are a plethora of options available to sole traders, so talk to your accountant to be sure you’re making use of all of them.
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