Accounting Business Reporting for Decision Making

CHAPTER 3 Business structures 93

For example, the individual could be sued by one of the employees of the business for an act of negli-

gence. If the owner is found guilty of negligence, then he or she will have to meet all the costs associated

with the case and also the amount of damages paid to the employee. Taxation can be a disadvantage —

the sole trader can pay more tax on business income because individual income tax rates are often higher

than the rate applied to companies, which is currently 30 per cent.

The sole trader is also limited by the skill, time and investment of the individual owner. This could be

an issue if the sole trader wants to take time away from the business, or wants to expand the business but

is restricted by his or her own funds. The sole trader’s business will cease to exist if the owner decides

to leave the business.

The sole trader business structure can be restrictive for those businesses trying to secure opportunities

with the government, as government departments may be reluctant to do business with sole traders

because of the non-legal status of sole trader entities. Further, if the business reports a loss, then the

sole trader is ultimately responsible for the loss and cannot offset the loss with other business partners.

Finally, if something happens to the individual, such as incapacitation or death, then the business will

cease to exist. Illustrative example 3.1 demonstrates some of the issues facing sole traders.

ILLUSTRATIVE EXAMPLE 3.1

The sole trader

Nicholas Cash is the owner of Advantage Tennis Coaching (ATC), a Brisbane tennis coaching clinic

which provides services to customers in the form of tennis coaching. Recall that a service-based entity

may provide equipment-based services or largely people-based services.

ATC leases a number of courts at the Brisbane Tennis Centre in Tennyson, Queensland. The business

commenced operations on 1 September 2016 and is building a customer base consisting of beginners,

competitive juniors, adult masters and retirees who would like to play social tennis.

One morning, one of the older players approached the reception area of the Tennyson courts to

book an extra lesson prior to an upcoming Masters’ Tournament. Unfortunately, as she approaches the

counter, she loses her footing and slips on a recently washed area of the floor. She just misses hitting

her head on the concrete structure beside reception but falls heavily on her side and hip, which causes

her to scream out in pain. Immediately, Nicholas rushes over to assist her as the receptionist calls an

ambulance. The retiree consequently spends three weeks in hospital with a dislocated hip and, while

recuperating, contacts her lawyer to begin proceedings against ATC. Nicholas has insurance to cover

such incidents, but the insurance will not cover all the costs involved.

Nicholas pays what he can out of the business’s bank account, but he still needs over $100 000 to

settle the lawsuit. In order to meet the remainder of the costs, Nicholas will need to mortgage his house

to the bank and borrow against those funds.

VALUE TO BUSINESS

•   A sole trader is the single owner of a business that is solely controlled and managed by that person.

•   Sole trader entities have low start-up costs, with minimal paperwork required.

•   Sole trader entities pay no tax. An individual owner includes business profits or losses in his or her

individual tax return.

•   There are no formal guidelines for sole trader entities to follow when producing financial statements.

•   The main advantage of the sole trader structure is that the business is relatively simple and cheap to

set up, and the owner has total autonomy in decision making.

•   The main disadvantage of the sole trader structure is that the owner is totally responsible for all the

debts and legal actions against the business, leaving the individual’s personal assets at risk if the

business runs into trouble.