If you want to become a tradesman or tradie contractor but are confused regarding the costs involved, this post is for you. In this post, we’ll take you through all the financial considerations that you should pay attention to before starting your journey as a tradie contractor. Along with the costs to set yourself up as a contractor, we’ll also take a look at insurance for tradies. So, without further ado, let’s get started.
Working as a sole trader
The first thing you need to do is decide on the structure of your business, i.e. sole trader, company, or partnership. If you plan to work by yourself without hiring anyone else, you should ideally opt to become a sole trader. Setting your business up as a sole trader doesn’t involve much. All that’s needed is an Australian Business Number (ABN).
You can apply for an ABN in two different ways:
1. Applying for the number yourself
2. Applying via your accountant
It doesn’t cost anything to apply for an ABN. However, if you apply through an accountant, you may have to pay a fee for the accountant’s services. Once you receive your ABN, you’ll be able to track your expenses and income from the very first day of the commencement of your business activities. You will also need the right tradie insurance policies for financial coverage.
Application for the ABN requires the following information:
- Location of business
- The contact details of the owner and associates (if any)
- Legal trading name of business entity
- Details about any previous ABN, Australian Company Number (ACN), or Australian Registered Business Number (ARBN)
- The registration number of the tax agent
- Tax file number
If all the information is submitted correctly, you’ll get your ABN as soon as you are done with your application. However, if any required information gets omitted or is needed to be verified, you may have to wait up to 28 days to receive your ABN.
Pros and cons of being a sole trader
Being a sole trader has several positives, but it comes with certain negatives as well. Let’s take a look at the advantages of being a sole trader first.
- Easy to set up: A sole trader business is incredibly easy to set up as all that’s needed is an ABN. You may also be required to apply for a trading name if you want to trade using a name that’s different from your own name. Both these processes are inexpensive and easy.
- Sharing same Tax File Number (TFN): If you operate as a sole trader, your TFN will be the business’ TFN as well, which means that you can file one tax return that will include both you and your business.
Now that you know the pros of working as a sole trader, let’s take you through the cons:
- Personal liability: The major disadvantage of working as a sole trader is that you will be personally liable in the event of a major loss. In the worst-case scenario, your personal assets may be seized.
Setting up a company
If you want an establishment that’s bigger than a sole trader, you should set up a company. Registering for setting up a company in Australia is easy. All you need to do is use the Business Registration Service (BRS) provided by the Australian Government. The costs of setting up a company would range from $417 – $506.
If all the information required to start a company is provided accurately, it won’t take you more than 15 minutes to have the application approved. If the required payments are made by credit card, you will get a confirmation within two business days. If the payments are made using bank transfer, EFT, or Bpay, it can take around five business days to register.
Now let’s take a closer look at the pros and cons of being a tradie contractor under a company-type business structure. We’ll start with the pros first.
- Separate legal entities: Under a company structure, your business and you will be considered as two separate legal entities. In the event of losses made by your company, your personal assets will be protected.
- Filing separate tax returns: Tax returns filed by you and your company are separate, which facilitates greater freedom in terms of how profits are either retained or paid.
However, there are certain cons of a company structure that you should consider as well:More expensive to set up: Compared to a sole trader business, setting up a company is way more expensive. Along with the registration costs, you also have to spend a lot of money, time, and effort towards setting up an office, hiring employees, and paying their salaries.