If you’re thinking about starting your own business, that’s great news!
Like many businesses, you might start by setting up as a sole trader.
Setting up as a sole trader is actually quite simple, but it’s important to understand what this means for you (especially in the long run).
Put simply, operating as a sole trader means you’ll be running your business under your own name.
Rather than setting up a different structure (such as registering a company), a sole trader structure is great if you want to keep things simple. It helps keep your costs low, you’ll be quite flexible in what you can do, and there’s very little administrative work involved.
But you still have to understand what being a sole trader means for you legally.
In this article, we’ll guide you through what it means to operate as a sole trader: the risks, opportunities, and the legals you’ll have to think about to run your business as usual.
What Does It Mean To Be A Sole Trader?
Operating as a sole trader is very common for many small businesses — from musicians to shopkeepers and consultants, creatives, and trade businesses.
This is often because setting up a sole trader business is cost-efficient and simple, and there’s little to no administrative work involved.
But it’s important to understand what else being a sole trader means for you:
- Tax is simpler for sole traders than other business structures, with business income seen as inseparable from your individual income. You also don’t need a separate bank account for your business income.
- You can still have your own employees. You’ll also need to pay your employees their full entitlements.
- You are still personally liable for business debts. This means that your personal assets could be used to pay off business debts.
- You are your own boss. You have complete authority over decision-making in your business, with there being only one owner of the business.
- You’re not entitled to sick pay or personal leave.
How Can I Limit My Liability As A Sole Trader?
At Sprintlaw, we’ve spoken to many sole traders who are concerned about their personal liability. Since the business operates under your own name, you (and your personal assets) become responsible for any debts or liability arising from your business.
To limit your liability as much as possible as a sole trader, it’s a good idea to think about:
- Having a well-drafted contract in place
- Insurance options
If you have a contract with your clients, the contract will limit your liability to your client (the person who signed the contract). However, it’s a good idea to also seek insurance to cover any other person who has not signed your contract and may experience harm from your product or service.
In this way, legal documents and insurance often work together — and it’s still a good idea to think about both options as a way to limit your liability as much as possible as a sole trader.
If I’m A Sole Trader, How Can I Make Sure I Get Paid?
An issue we see recurring among many of our clients who are sole traders is that they experience difficulties receiving payment on time.
As a sole trader, it’s common practice to send invoices to your clients whenever you complete work for them.
But how can you make sure that you’ll be paid in time? And what are your options if payment isn’t made?
Often, sole traders might have to resort to sending letters of demand to chase their clients on payment. But this may actually cause operational problems for your business. And, as a sole trader, the last thing you want is a relationship to go sour with a great client.
You can actually avoid these issues from the very beginning by having a contract in place.
Why Do I Need A Contract With My Clients?
No matter how great your relationship might be with your clients, it’s always a good idea to have something in writing. This can save you from lots of headaches, misunderstandings and expense later down the track.
You can call this contract anything you want — whether it be a Contractor Agreement, Business Terms & Conditions or a Service Agreement. In any case, it is essentially a legally binding contract that sets out the agreement between you and your client.
And it doesn’t have to look intimidating! You can easily send your contract to clients by attaching it to an email, to the back of an invoice, or using e-signature platforms to make it more efficient.
A good lawyer can work with you to make your contract as simple as possible and customised to your business’ requirements. This way, you’ll be able to understand exactly what you’re agreeing to (and your client will, too!).
Generally, your contract with your clients will:
- Lay out the terms. To ensure both you and your client are on the same page, a contract will describe exactly what you are and are not doing for them. When we draft T&Cs for sole traders, we’ll generally include a customisable cover sheet, so you can reuse this contract for each of your customers.
- Secure your revenue streams. The contract will detail how and when fees should be paid, whether there is a deposit, and consequences of late payment including if interest applies.
- Limit your liability. It’s important to strike the right balance between limiting your liability to the maximum extent, and abiding by the relevant consumer protection laws.
- Protect your intellectual property. Any materials you have created in the course of your business, or materials created by your employees, should belong to your business.
- Plan for disputes. Should there be any disputes down the track, a contract will stipulate how and where they should be handled, including the use of mediation.
If you’re a sole trader with no contract with your clients, this leaves plenty of room for misunderstandings and potential disputes with some of your clients. As such, putting your agreement down in writing can make sure both parties are on the same page from the very beginning.
As A Sole Trader, Can I Sub-Contract Out My Work?
When working as a sole trader, at times, you may want to sub-contract out some of your work to other businesses.
For example, let’s say that you own a cleaning business.
As a cleaner, you might offer general cleaning services. However, some of your clients might ask for more specialised work on top of your general services, such as carpet cleaning.
So, what happens if you can’t offer carpet cleaning, but you don’t want to lose that client?
In this case, you can sub-contract out some of your work to specialist carpet cleaners. Your client will still pay you for it, and you’ll have to pay the contractor who has provided the carpet cleaning services for you.
This is what you call sub-contracting, and it’s important to get it right!
The key risk with sub-contracting is that, if you promise your client one thing, you need to make sure your sub-contractor is on the same page as well.
As such, you’ll need a Sub-Contractor Agreement with your sub-contractors to clarify what their services include, how payment will work, and a process for what happens if a client is unhappy with their work.
On top of that, you’ll want to make sure that your client is happy for you to sub-contract out some of your work. In whatever contract you have with your client (such as a Service Agreement), make sure there’s a clause that allows you to do just that. This way, both you and your client explicitly agree that you can use sub-contractors.
If you’re not sure how to set this all up, a good lawyer can make sure you have the right contracts in place.
What If My Business Grows?
While a sole trader is the most sensible, simplest and cost-efficient structure when starting up, it’s always great to be thinking ahead.
What happens when your business grows?
Generally, you might start thinking about protecting your personal assets and setting up a more formal structure.
Even if you’re just starting out as a sole trader, you can still change your business structure later down the track (into a partnership, or a limited liability company).
However, it’s important to be aware that there are costs in setting up your business structure. As such, often businesses prefer to get their structure right from the beginning (despite initial set-up costs) to save themselves from the trouble of changing structures later.
While it is completely up to you, it’s still a good idea to be aware of the different structures and what they would mean for you. This way, you can plan the direction your business will take. You can learn more about business structures in this article.
Need Legal Help?
Whether you’re only just getting started in the business scene or you’ve already been operating as a sole trader for quite some time, don’t hesitate to reach out!
We’re happy to help with any questions you might have, and we can help you set up your structure and contracts. You can reach our friendly team at [email protected].
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