With the SME Association of Australia declaring the sector as “a vital part of the Australian economy with around two million SMEs representing more than 99.7 per cent of actively trading businesses,” many workers are ditching their day jobs to start a small business under their own name, thinking it’s as easy getting an ABN and hanging out a shingle.
However, unlike big business, the SME sector is unlikely to have the luxury of an in-house team of lawyers and accountants, keeping them on track, out of trouble and compliant. And unfortunately unlike big business, many SMEs place themselves at huge risk of closure by failing to appreciate the significance of the business structures, namely Sole Trader” and Limited (including Pty Ltd companies).
“It’s a common mistake,” says Catherine McMurtrie, Director of Advanced Accounts in Sydney. “Probably because many business owners see no reason to change from their current status as a sole trader, a structure they formed when they launched because it had a low cost for entry and was simple and easy to set up. And change just spells more paperwork, overwhelm, time and ultimately cost which is not an attractive prospect to busy business owners who are already busy working IN the business.”
“What they don’t realise is, it can become the most significant decision they will ever make and in some cases, the difference between bankruptcy or losing their house and growth.”
One of the most common scenarios presenting enormous worry and potentially financial ruin for business owners is from sole trader businesses failing to incorporate when necessary, and discovering a whole raft of issues, which come to a head at tax time:
Having saved many businesses and families from financial ruin, Catherine is well placed to understand their plight.
She explains that it doesn’t have to be this way. “SME’s must switch on to the real risks of remaining as a sole trader and forget their unjustified misconceptions about exactly what incorporating means,” McMurtrie says.
One business owner who was fortunate to escape prosecution by the ATO was Peter Furness, from Sydney. “I naively overlooked the importance of trading in the right structure and had it not been for Catherine, I was heading for bankruptcy. I could see no way out,” he says. “The irony was it was a completely avoidable situation had I not made the assumption that being a sole trader regardless of my situation was harmless. Yes, incorporating means a bit more administration, more expense and more attention to detail, but it also means asset protection and the larger the business grows, the larger risk to personal assets, and the more you will need to be protected.”
The liability of sole traders is not limited. Loans provided to sole traders will generally be secured by their personal assets – which can sometimes include the family home. This is probably one of the simplest consequences to understand when business owners opt to become or remain a sole trader, yet has the greatest unwanted impact.
With SMEs employing 70 per cent of the Australian workforce, business owners in this sector have a legal and moral responsibility to ensure their business is operating appropriately, protecting both their employees’ livelihood and that of their family.
Kate Engler, The Publicity Princess, www.meetthepressmasterclass.com.au