It’s an ambiguous phrase and often misused or confused with other similar titles. If you’re planning on starting your own business or working full time as a freelancer, it’s important to understand what a sole trader is.
In this article, we’ll give you a clear definition and explain how it differentiates from other similar terms. We’ll also look at the advantages and disadvantages of being a sole trader, so you can decide if it’s the right title and business structure for you.
A sole trader is someone who owns and operates a business in their own name. They keep all after-tax profits from their business, and they maintain full liability for the business.
Within Australia, “sole trader” is also a business structure, and it’s very common for freelancers and independent contractors to classify themselves as a sole trader when setting up their business.
The term “sole trader” is used throughout Australia, New Zealand, and the UK, but not in North America, where “sole proprietor” is more common.
It’s easy to get sole trader mixed up with other similar terms, so let’s break down the definition of sole trader further by comparing it to other business structures and titles.
When setting up your business and applying for an ABN in Australia, you’ll need to decide whether to classify yourself as a sole trader or a company.
These are two separate business structures, and the designation you choose will depend on whether you plan to trade under your own name or as a company.
A sole trader designation means the individual who owns and operates the business is a single entity in the eyes of the Australian Tax Office. As a sole trader, you will have a single Tax File Number (TFN) and a single ABN. You will register your business name under your own name, for example, “John Smith” or “John Smith t/as John Smith Photography.”
A company or Pty Ltd designation will mean the individual who owns the business is a separate legal entity from the business itself. The business will have its own Tax File Number and ABN. When you register your business name, you can register it under any available name you like, for example, “Lens and Filter Photography Pty Ltd”.
In Australia, “partnership” is another business structure you can choose when setting up a business. The primary difference is that a sole trader is a single person who owns and operates a business, whereas a partnership is a business owned by two or more people.
This also means that you won’t be singly liable if there are legal issues with your business—you will share the responsibility with any partners you have. If you ever want to change your business structure or dissolve the company, you will need to work closely with your partners (whereas a sole trader could make these decisions on their own).
You’ll often hear these three terms used interchangeably, because in many ways, they all describe the same thing: a person who owns and operates their own business.
Both “freelancer” and “self-employed” are more casual terms—they are not legal business structures in Australia. A freelancer describes anyone who offers products or services independently. It’s very common for freelancers in Australia to register as sole traders when they apply for an ABN.
“Self-employed” is a very broad term that can apply to anyone who predominantly works for themselves. They may be a freelancer, a business owner, a sole trader, or a contractor.
Now that you have a better understanding of what a sole trader is, you may be wondering why you’d choose to register as a sole trader rather than a company.
Sole traders who use Rounded are one step ahead of the game when it comes to taxes and finance. Our software makes it easy to keep an eye on your annual and quarterly income, and you can generate a business activity statement with just a few clicks.
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