Sole Proprietorship businesses (also known as “Sole Traders”) are the simplest and cheapest business structure to create in order to operate a business and that makes them a popular choice for business owners looking for flexibility in operations, management and exit. The Australian Bureau of Statistics (ABS) data shows that Sole Traders account for approximately 26.2% of all registered businesses operating at the end of the 2016-17 financial year, a 4.5% year on year increase from 2015-16. Sole Proprietors typically operate businesses as Taxi Drivers; Solicitors; Cleaners; Consultants; Bookkeepers; Mixed Businesses (General Goods); Restaurants and Cafes; Property Investment; Handymen and Tradesmen.
One significant risk attached to Sole Proprietorship is the exposure of the business owner to unlimited personal liability for debts incurred. In circumstances where the business is without sufficient funds to meet its debts incurred, the Sole Proprietor’s assets are exposed and available to meet the said debts. In extreme circumstances, this can lead to Sole Proprietor being declared Bankrupt, in the event his or her personal assets are insufficient to meet the business debts.
Key Considerations for Sole Proprietor Business Bankrupts
Bankruptcy does not prevent a Sole Proprietorship businesses from continuing or commencing. There are however some fundamental matters and issues that a Bankrupt ought to be aware of:
- If the business is being conducted in a name, other than in the name of the Bankrupt, the Bankrupt must disclose their name and their status as an undischarged Bankrupt to everyone who they conduct business dealings with, such as suppliers; financiers and customers (Section 269(1(b)) of the Bankruptcy Act 1966 (“the Act”);
- If the Sole Proprietor (Bankrupt) is seeking any form of credit (i.e. the provision of goods or services on a trading account, issuing cheques, or entering into a hire-purchase agreement) and the value of that credit exceeds $5,703, the Bankrupt must disclose their undischarged Bankrupt status to the provider (Sections 269(1)(a); (aa); (ab); (ac); (ad); and Section 304A(1)(j) of the Act;
- Tools of Trade (used to earn an income) and Motor Vehicles (used as a primary means of transport) may be retained up to agreed value limits (presently $3,700 and $7,800 respectively) (Section 116(c)(i) and (ca) of the Act and Regulations 6.03B(1-4) of the Bankruptcy Regulations 1996 (“the Regulations”);
- If the Sole Proprietor (Bankrupt) wishes to maintain an existing Australian Business Number (ABN) attached to the business, the Bankrupt will need to inform the Australian Taxation Office (ATO) accordingly. There is no restriction on a Bankrupt applying for an ABN and income must be reported on a cash basis;
- If you operated your Sole Proprietor business (prior to bankruptcy) on a cash basis, any debts due to that business at the date of your bankruptcy, but not yet paid (debtors) are not assets of your Bankrupt Estate. Rather, the funds that you collect in the ordinary course of continuing that business (post-bankruptcy) are deemed income and assessed for compulsory income contribution purposes;
- Ordinarily amounts drawn from the business by the Sole Proprietor are classified as “drawings”. No tax is paid on these drawings however the income of the business is treated as the income of the individual proprietor. The assessable income can be reduced by permitted deductions, however Bankrupt’s should be aware that deductions for income tax purposes are not necessary deductions for income assessment purposes in bankruptcy. For example, deductions of a capital nature (such as depreciation) are not allowed in bankruptcy. In this sense, Net Profit in bankruptcy isn’t exactly the same as Net Profit for tax purposes; and
- Personal, unlimited liability, continues for Sole Proprietor bankrupts who operate businesses post the commencement of their bankruptcy. Practically, a Sole Proprietor bankrupt can be pursued for recovery of an unpaid business debt incurred post the commencement of his or her bankruptcy and conceivably, if not satisfied, could end up being declared “bankrupt” again.
- Certain industry bodies and professional associations apply restrictions, conditions and/or covenants on members or licensees who commit an act of bankruptcy under the Act. State and Federal Governments also administer different legislation governing eligibility for certain trades and professions.
AFSA administers the following webpage which contains links to the websites of certain trades and professions where restrictions may apply: https://www.afsa.gov.au/insolvency/i-cant-pay-my-debts/employment-restrictions
It is a fact of life that not all businesses succeed. Many endure legitimate financial distress and loss, leading to eventual failure. Sole Proprietor business operators are exposed to individual bankruptcy as a result of their personal and unlimited liability for business debts.
Bankruptcy can be an effective rehabilitative process designed to promote and educate debtors on better and more informed business choices, whilst freeing the shackles created by existing debt.
The team at C&D Restructure and Taxation Advisory are here to help. As part of the Vault Group we can offer the full suite of financial products and advice to help you navigate the business landscape. Schedule a meeting here via Calendly or give us a call on 1300 1 VAULT (1300 182 858)
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