What Are The Common Types of Sole Trader Businesses?

Here Are The Common Types of Sole Proprietorship Business You Should Know About-

Know About The Common Sole Trader Business Types Here-

What is a sole trader business?

Amongst all the business structures that are prevalent across the world, sole trader businesses are the simplest of all. These businesses are run by a sole trader, who is a person legally responsible for managing all business affairs. These types of businesses consist of an owner, and all profits and losses of the enterprise are reported on the person’s personal income tax return.

A sole trader is liable for paying all liabilities of the businesses, and any consequence of default in meeting business obligations are faced by him or her personally. While it may sound intimidating to start a sole trader business, the reality is that this type of business is fairly easy to establish. Moreover, it does not involve large costs, thereby making it one of the most attractive business models for fledgling entrepreneurs.

Types of sole trader businesses

Just like in other parts of the world, a sole trader business can be of different types in Australia. Let’s take you through the three most common types of sole trader businesses here:

1. Self-employed owner

The first type of sole trader business is self-employed business ownership. Essentially, a self-employed business owner is a person who conducts business or trade with the objective of earning a profit from the venture. The self-employed business owner may choose to run the business either as a part-time or full-time venture, depending on his or her resources and constraints.

One aspect of self-employed business owners is that is there is generally no contractual relationship between the business owner and his or her customer or client. Also, the relationship does not have any semblance to a typical employer-employee arrangement.

A typical example of a self-employed business is a retail shop. One person may start and run the business on his or her own terms. There may or may not be any employees working for the person at the shop. Another classic example of this type of sole trader business is an online merchandiser. A sole proprietor may set up an online store alone and start selling products to customers—something that has become largely possible thanks to the advent of the internet and technology.

2. Franchise

Another form of a sole trader business is a franchise. Under this business model, a sole trader, also called a franchisee, strikes an arrangement with a franchisor to use his or her company brand in exchange for a fee. The franchisee bears the obligation to stick to a business model that’s determined in advance. This model puts the person in charge of marketing, operations, pricing strategy, and business expansion.

Under a franchise model, the franchisee is also supposed to pay the franchisor royalty. This is generally a percentage of the gross sales of the business unit. Franchising business is quite a lucrative model for a sole proprietor who has minimal business experience. This is because the franchisor aids the franchisee in operations and marketing, as well as in making the business model a successful one.

Expanding the business into international markets become quite easier under this model because the franchisee has good knowledge of the local market. Also, when it comes to advertising and business promotion, the franchisor can reach the target market more effectively through co-operative promotion initiatives.

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3. Independent contractor

Lastly, independent contracting is a type of sole trader business that resembles a self-employed business. The difference between an independent contractor and a self-employed business owner is that the latter’s role is more like an employee. The independent contractor works for an employer and performs certain tasks.

However, unlike a self-employed business owner, no tax is deducted from the person’s pay. It’s also important to note that an independent contractor, although hired by an employer like an employee of an organization, is not entitled to receive any perks and benefits.

Contrary to employees hired by an organization, an independent contractor enjoys the privilege to either accept or decline assignments. There’s a significant difference between the level of control that an independent contractor and an employee has on their respective work processes.

Nonetheless, independent contracting is an attractive type of sole trader business where the contractor can exercise more control over his or her service provision.

Closing lines

The above are the three most common types of sole trader businesses found in Australia. These businesses are relatively easier and simpler to set up and run compared to most other business models. There are fewer reporting requirements, and there are many ways to offset any business losses against other incomes. Not to forget, these businesses are also much easier to change structurally or dissolve when the need arises.

However, just like any other business, a sole trader business is subject to different risks. This is the reason why Professional Indemnity insurance is important for mitigating these risks. To know more about Professional Indemnity insurance, visit this website.

*As with any insurance, the cover will be subject to the terms, conditions, and exclusions contained in the policy wording. The information contained on this web page is general only and should not be relied upon as advice.

References

Chron, Author: Chris Joseph, Types of Sole Proprietorship, Avl at: https://smallbusiness.chron.com/exclusive-distribution-agreement-vs-franchise-77034.html

Small Business Development Corporation, Sole trader, Avl at: https://www.smallbusiness.wa.gov.au/business-advice/business-structure/sole-trader

Savvy SME, Starting a Business in Australia: Setting Up as a Sole Trader, Avl at: https://www.savvysme.com.au/article/1501-how-to-set-up-a-sole-trader-business-in-australia

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