92 Accounting: Business Reporting for Decision Making
number. Sole traders are not bound by any formal requirements such as accounting standards, so they
can be quite flexible in their reporting of the entity’s financial performance and position. However, some
entities use computerised accounting packages such as MYOB or QuickBooks to assist in report prep-
aration and determining business profit. Common examples of sole trader entities include most trades;
for example, plumbers, electricians, hairdressers and carpenters.
3.3 Advantages and disadvantages of a sole trader
LEARNING OBJECTIVE 3.3 Discuss the advantages and disadvantages of a sole trader.
As with all business structures, there are both advantages and disadvantages of this business form.
Advantages
Being a sole trader has several advantages. First, the sole trader entity is a quick, inexpensive and easy
form of business to establish and can be inexpensive to wind down. The sole trader form is not subject
to company regulation such as the Corporations Act 2001. The sole trader business does not pay separate
income tax, as the individual owner reports business income or losses on his or her individual income
tax return. The owner has total autonomy over business decisions, and is therefore free to choose the
direction of the business and its strategies and policies. A further advantage is that the owner claims all
the profits of the business and all after-tax gains if the sole trader business is sold.
Disadvantages
As the sole trader’s business is not a separate legal entity, if the business is involved in any form of legal
dispute, the individual owner has unlimited liability, which means full responsibility for the business
debts and any legal actions.
If a sole trader business is involved in any form of legal dispute, the individual owner has unlimited liability.