Sole Trader Or Small Business? Exploring The Benefits & Differences

Are you considering whether you want to operate as a sole trader, or maybe start a small business? Perhaps you have a skill to sell, a craft to share, or a talent to profit from. Whether your niche is in landscaping or literature, it’s important to understand the benefits and differences of both.

In this article, we’re doing just that. Once you’re clued up on what it means to be a sole trader, and what it means to run a small business, you can decide which avenue you want to go down.

Keep reading as we explore the benefits of both and the differences between the two.

What is a sole trader?

A sole trader is essentially someone who runs and operates an entire business. A sole trader is legally and independently responsible for all aspects, including debts and losses. It’s a straightforward, quick way of starting your own service or selling your own products, especially if you’re operating solo without tangible plans to expand. You can employ others, but you cannot employ yourself. Any sick or holiday leave as well as superannuation contributions will be made from your own pocket.

What is a small business?

In tax terms, a small business (or a company), is a ‘separate legal entity with its own tax and superannuation obligations’. It is run by directors and owned by shareholders, who might be the same or different people. A company can make profits that are distributed among its shareholders, directors and colleagues, although there are other financial obligations involved in running a small business that must be carried out, such as enforced tax and superannuation contributions and business activity and issue distribution statements.

What’s the main difference between a sole trader and a small business owner?

The best way to separate out the two is to think of a small business existing as an independent entity, whereas a sole tradership is a formalised extension of one person’s skill, knowledge or trade turned into a business operation. 

Sole traders do not fill out a separate tax return for their operations and have slightly different tax obligations. Their business is an extension of their personal income. Meanwhile, small business owners share responsibilities, duties, liabilities and profits with others, making it a less personal venture.

A sole trader has complete control over their entrepreneurial endeavours, although they are uniquely responsible for both the successes and stresses of running an independent business.

What are the benefits of being a sole trader?

• Total Control

When you’re a sole trader, you’re on your own, and you’re able to decide exactly when, where and how much to work. This total control also makes it quicker and easier to get your enterprise going. If you’re ready to start tomorrow with all the tools, knowledge and capacity on hand to provide the product or service you’re selling, operating as a sole trader means you don’t have to waste time (or money) setting up a new entity before you can start earning.

• Minimal Admin & Reporting

Another benefit of being a sole trader is not needing to do as much paperwork as you would if you were running a small business. You don’t need to fill out a separate tax return and you can make all creative and financial decisions without waiting for approval. If you decide to shut up shop literally or figuratively, you can stop operations or trading with much less admin and more quickly than if you were dissolving a company.

• Personal Set-Up

Faceless corporations can be popular in some industries, but for others, a trusted, experienced individual might be preferred. If clients or customers prioritise a human connection, sole traders are able to develop this more easily as they have consistent, direct contact. Not only that, you get to keep all the profits, tips and gifts for yourself!

What are the benefits of being a small business owner?

• Branding Potential

If you’re a small business owner, putting some space between yourself and your company can be a great idea. Not only does it provide a larger buffer for reputation in case of loss or difficulty, it also makes it easier for scaling operations in the future. You’ll be able to build a brand that you can market, increase your local presence, and build your industry influence. As a sole trader, you have to get comfortable with marketing yourself. Running a separate business means you can delegate depending on your strengths, and therefore provide your company with a better chance of lasting success across all departments.

• Investment & Funding Opportunities

If you’re seeking external funds from investors, banks or potential shareholders, presenting a business plan and a fledgling company is likely to instil greater confidence. Some grants and competitions are only open to small business owners. Setting up and running a company does require more money, but it can also open doors to secure rapid and more robust investment. You’ll also have the opportunity to contribute to the wider regional economy, which can be a rewarding experience in itself.

• Tax Return Benefits

Small businesses receive tax returns that sole traders don’t always have access to. Filling out this form each year can be a lengthy process and might benefit from assistance from a local, trusted tax accountant, but it can also help you claim back some significant amounts to reduce your operational costs. There are options to claim back work uniforms, certain travel expenses, charity donations and work equipment. Even remote-work or office equipment such as laptops and coffee machines can be tax-deductible.

Sole Trader Or Small Business Owner: Which Is Right For You?

Deciding whether you’re better off as a sole trader or small business owner comes down to your industry, your working  capacity and your future plans. If you intend to start your own business as a side hustle or part-time job, or if you provide a very specific service that you intend to keep local and small-scale, operating as a sole trader may work better for you.

On the other hand, if you have grand plans to turn your entrepreneurial idea into a more committed, full-time earning venture, and you have others who are or would be keen to invest in your proposal, setting up a partnership, trust or company and working as a small business owner might be more appropriate.