Legal Tip 345: Sole Trader Confusion

A lot of people confuse the concept of being a ‘sole trader’ or ‘running a business’.

A sole trader is not a separate entity, in either tax or law. They are both the individual – there is not legal or taxation difference.


One client told me once that they didn’t own the car. It was a business asset. But the client was a sole trader which meant they did own the car. They were the business entity.

This is the same whether there is a registered business name or not. A sole trader is an individual.


When a person is a sole trader there is no segregation between them and the business.


Example

Bart sets up a business selling widgets. He applies for an ABN in his own name and applies for a Business name so he can trade as ‘Bart’s widgets’.

Bart is the business. He is the entity that is taxed. The business income is added or deducted from Bart’s other income.

If someone sues they will sue Bart.

Bart will buy and own business assets. The business cannot buy or own anything as it is not a thing, not an entity.

Nothing can be owned by ‘Bart’s widgets’.

Bart is known as a ‘sole trader’ because he is not operating as a company or a partnership or as trustee – it is just him.

 

The other confusions areas are :

• A company is me
• A company must be registered for GST
• I am a company
• I want a company ABN
• I am a Pty Ltd company
• I can setup a company with ASIC online - A really stupid thing they allow which is always wrong.

All are wrong. And it gets more complicated...............................

A sole trader is not a entity. It is a person. A human with a tax file number and date of birth. A company has a ACN and is registered with ASIC. It ill have its own ABN and TFN. A business name is also registered with ASIC and can only be used by the ABN linked to it. Or with permission...which can be revoked.

ASIC allow two or more similiar names. Not idential names. Some names are prohibited too eg Bradman Pty Ltd. (Yes Don Bradmans a prorected person still !!)
But as we explore below just because you can register a name with ASIC for a company OR reg business name doesnt mean you should.

Pty Ltd is a sign a COMPANY is in existence. Search ASIC. Limited info is available but more can be accessed by paying small fees to search.

A company is a tax and legal entity established under company law and to confuse matters is a legal person who can sue or be sued. Its owners are shareholders. Its operators are "officers" and do not need to be owners ...but could be. Owership is proportional based on shares classes, qty and rights. This information is private other than qty of shares and names. Owners are not sued or generally liable for company debts or losses. Officers may be. the company IS liable and could be sued and placed into "winding up" if it cannot pay. Directors can be sued for insolvent trading in that situation if they allow it to continue. The persons associated with a company are just managing the company. It is a seperate thing to them. Hence the asset protection issues etc. The company may also have employees. A Director may be a statutory employee and still be unpaid. How confusing ???

A sole trader MUST obtain a registered business name to use anything other than the persons name to trade. Their personal ABN will be linked to that name. If you dont renew the name is lost and another can take it. You must then sue. Good luck.
A company can use its own name and can also apply for reg business names as well eg Cadbury Australia own Red Tulip and other names. The company ABN should be linked to the name BUT with permission another person may allow use of the name eg franchises or a human who owns the reg business name.
Tip : A compayy should NEVER also register its own name as areg business name without Pty Ltd. Its not needed. The name cannot be registered by anyone. Its "taken"

A reg busienss name offers very limited rights to domains and trademarks names. Trademarks are a seperate application that is limited to industry type etc. eg Cadbury Red Tulip and logos etc are all trademarks likley limited to confectionary and chololate. Some trademarks can be very broad eg "Virgin...." or Qantas. It may give legal limitations to use of a name or image which IS available for registration. Doest eman you should !! . Lawyers monitor for infrigement on intellectual property rights. eg Registration of a company called Virgin Anything Pty Ltd will result ina legal claim. Doesnt matter if it doesnt trade they will push it.

 

I was recently asked to do a loan agreement for a company to lend another company money. The borrower company didn't have 'pty ltd' at the end of their name so I did a check and found it was a sole trader with a business name registered.

That meant they would have been taxed on the loaned money as a dividend had I not picked it up - the lender insisted it was a company.

A div7A compliant loan agreement was needed as the sole trader was related to the shareholder of the company lender.

 

I have also seen companies formed and NOT USED. Apparently changing accounting software and bank accounts is difficult.

Individual applied for a business name XYZ Sales = traded as sole trader.
Then his former accountant advised and a company was formed. XYZ Sales Pty Ltd. Nobody changed bank accounts or Xero software and didnt sign any docs either !!! Didnt even apply for a ABN or PAYG withholding...Missed cashflow boost costing $50K in benefits. My opinion was that the company didnt trade and all the BAS lodgements were incorrect to be reported as company income. We had to cancel those lodgements and relodge as individual. A complete mess. Reporting that income as company income would have been a Part IVA tax benefit concern so arguing it was held on trust etc didnt fly either. Solicitor just frowned. He did suggest a binding ruling. I checked tax invoices sent to customers and they had the sole trader ABN as I suspectd and it wasnt even worth trying.

Solicitor didnt find neglignce likely to be successful on part of the adviser as the client didnt read a thing he was sent. Accountant sent reminders and then gave up. Their PI insurer paid solicitors who sent a detailed chronology of the client lack of attention to detail.