Sole traders’ biggest risks and how to insure for them
Sole traders’ biggest risks and how to insure for them
Sole traders enjoy the “simplest and cheapest business structure”, according to the Australian Government Business Register. You’re in full control. You make the business decisions.
The good news is you won’t have to pay a registration or annual fee to set up ‘shop’. It’s free to get your Australian Business Number, and it’s only a small cost to register your business name. Although there may be compulsory business licensing fees for the sector or profession in which you operate.
That’s where the complexity and risks begin.
Limited scope to raise capital
An injection of funds can boost business growth to allow you to scale your operations. As a sole trader, you will be able to raise capital, but there’s a catch. The sole trader has full financial liability for the debt, therefore the options available are limited.
If you take out a loan for your business, generally your personal assets, including your home and car, will be used to secure it. You risk losing those if you’re sued and don’t have adequate insurance protection. Sole traders also can’t offer shares to raise capital.
Liable for debts
When you fly solo, you’re legally responsible – that is, liable – for every aspect of your business, including debt. Business income is seen as inseparable from your individual income and tax must be paid. Even your personal assets are vulnerable if things go awry and an aggrieved client sues you, for example.
If you hire Australian staff, you will have to ensure you meet all your legal obligations, such as workers compensation and work, health and safety. Plus, if you pay your staff or contractors $450 or more a month, you must pay them superannuation.
Tax-time nightmare
When you’re setting up your micro-business, there are plenty of business costs you can claim as a tax deduction against your assessable income. You’ll pay the personal marginal rate of tax, which might be higher than the company tax rate of about 30%. You won’t be able to retain profits – they’ll be taxed at your personal marginal rate. This Australian Tax Office website will guide you on the tax you’ll need to pay as a sole trader.
Ensure you have up-to-date records at tax time. You can reduce your tax bill by claiming losses from assessable income – such as your investment property – against your business. You’ll be able to carry tax losses to the next financial year. However, as a sole trader, you should also obtain expert advice from an accountant or BAS agent.
Lack of business continuity
Flying solo means when you pass away, your business won’t survive as a distinct legal entity. Its assets will be disbursed as per your will. Companies, meanwhile, have ‘perpetual succession’, so they can continue. For sole traders, though, your heirs can’t sell the ‘goodwill’ of your business – it goes with you.
Another issue to consider is sole traders tend not to have in-house lawyers or accounting experts to help them navigate legal and finance issues. Because you’re doing so much yourself, you’re more likely to be working in the business rather than on it.
Protection at hand
You might be a sole trader, but you’re not alone. More than six out of ten Australian businesses are small traders, according to the Australian Small Business and Family Enterprise Ombudsman. That’s why you’ve got a good choice of insurance options to protect your business risks. Consider these to minimise your risk profile, according to the Federal Government’s business website:
- Professional indemnity and public liability insurance, depending on your business operations, profession and sector
- Personal cover such as income protection, disability, trauma and/or life insurance
- Business interruption or loss of profits
- Workers’ compensation if you employ staff
- Building, contents, business vehicle
- Burglary
- Stock deterioration
- Damage/theft to your electronic equipment
- Farm insurance
- Goods and/or property in transit
- Breakdown of machinery
- Tax audit
- Product liability insurance
- Cyber liability insurance
Feeling overwhelmed? As your broker/adviser, we can help refine this list to customise your insurance coverage, so it’s a perfect fit. No more and no less than you need. You may well earn discounts by bundling your policies together, which will save time otherwise spent comparing insurers. We’re also happy to discuss your risk management to offer you tips. All part of the service.