If you’re earning your crust outside of the cushy confines of full-time employment you’re no doubt familiar with the terms "freelancer" and "sole trader", but do you know what they actually mean?
These terms are often used interchangeably, along with the words “company” and “business”, so I thought it might be worthwhile to define each one just in case you’re unclear. Please note I’ll be using the expression “employer” to describe the person who is paying you even if you’re not technically an employee.
Business
A business is something that exists to make a profit and is generally considered distinct from the person, or persons, that carry on that business. It is made up of myriad ingredients and could include product, IP, processes and procedures, client lists, equipment, contracts, employees and more.
A business needs to be conducted via something us accountants like to call a ‘structure’. This could be a sole trader registration for an individual, a partnership if there are multiple individuals involved, or you could look at stepping up to a trust or company structure.
A company is a legal structure that sits distinct from the individual(s) associated with it and is commonly used to run businesses and hold investments. A company can be used to carry on a business, but it isn’t necessarily in and of itself “a business”.
Freelancer
A freelancer is someone who works for a variety of employers typically on short or fixed-term contracts. These people might work for one employer at a time, turning up every day like a regular full-time employee but without holidays or sick pay, or they could work for multiple employers at the same time. They might work these contracts remotely (i.e. from home) or from the office of the employer.
These contracts typically don’t mean an employee/employer relationship, usually the freelancer will be invoicing a day/week rate for their time (and remember that means they are likely entitled to superannuation contributions to be paid for by their ‘employer’).
Whether or not a freelancer is carrying on a business is open to debate, but typically you wouldn’t consider a freelancer as someone conducting a business. They are more like an employee that happens to work for multiple employers throughout the year.
And on a related note, a contractor is someone who is engaged to deliver goods or services under a contract and is a term often used to describe a freelancer.
Sole trader
If you want to start a simple small business by yourself and don’t want to go to the expense and extra administration of having your own company, then you can register yourself with the Australian Business Register and get an ABN (Australian Business Number). With this number you’re officially allowed to wreak small business mayhem on the world. This is referred to as ‘carrying on a business as a sole trader’ – sole trader meaning it’s just you, nobody else and no legal structures involved.
Freelancers, whether they are carrying on a business in the truest sense or not, will need to register as a sole trader and get an ABN if they need to issue invoices to their employers for the work being carried out. Failing to do so could mean the employer withholds 47% as tax.
In summary
Freelancing and contracting refer to ways of being engaged in return for money (similar to being an employee) and may take the form of carrying on a business. Sole traders and companies are legal means by which to carry out these activities. Simple, right?
If you’re looking at starting your own small business and you’re not sure where to start why not get in touch with us today? We’ve worked with countless small businesses over the years and would love to help.