Sole traders and insolvency

A report on the financial business health of Australian small business takes the novel approach of looking at sole traders. Behind that positive image of being one’s own boss and personal work/life balance lies the lack of protection from Australia’s severe bankruptcy laws. While the government has touted its new rather ineffective company insolvency laws, its announced concern for “unincorporated businesses such as sole traders and partnerships” has led to nothing. 

Typically, small business is spoken of only in legal terms of a trading company, separate from the individual/s it represents. In reality, ABS and other data show a higher proportion of small business as sole proprietors though the usual criteria – number of employees or financial turnover – don’t make any distinction between the legal categories.[1]


The report, Sole Trader Pulse, by Hnry, says that

‘independent earners with an ABN, such as tradies, freelancers, and consultants, comprise the fastest-growing yet most underappreciated sector of the nation’s economy’.

It refers to a recent survey showing some positive and negative responses to various COVID-19 related issues such as its financial impact, government support, and access to credit.  Most respondents were positive about the long-term personal benefits of things like work/life balance and freedom that is said to come from going it alone.


What this report did not address is the lurking impact of the law on a sole trader who finds they have overwhelming debt and are being pursued by creditors.  Their main option is personal bankruptcy.  The positive side of this option is that it allows the sole trader to declare their position and make a fresh post-Covid start.  The negative side is that however the debts were incurred, Australian bankruptcy law is a severe process that lasts 3 years, involves constant monitoring by a trustee, various restrictions on resuming business, and on travel, and loss of all assets.  Magnanimously it allows a trader to keep their work equipment, and car, but only up to certain minimum values (A$3,800 and A$8,150).

The bankruptcy regulator AFSA has starting to report more detail on small business bankruptcies, which have accounted for up to 40% of the total, and show continuing high rates in certain sectors, in particular construction and retail.

In contrast, the law allows the over-indebted small business company next door to go into liquidation, or just be let go, with its proprietor starting again with a new company the next day.

Business structures

Hnry does discuss what business structure is best, referring to ASIC guidance that incurring significant debt supports incorporation of a business, though leading to additional “administrative burden and unnecessary costs”. But being a sole trader offers “a lot of the same benefits as registering a company”, including tax benefits.

Government inactivity

Senator Amanda Stoker’s Attorney-General’s Department consulted early this year on ways the strict bankruptcy system could be reformed to address the impact of the coronavirus on “unincorporated businesses such as sole traders and partnerships”, but nothing has been heard since,[2]  despite some thoughtful submissions, see for example Bankruptcy System and the Impacts of Coronavirus | PIPA

In contrast, coming back to the opening comment of this article, Mr Frydenberg has introduced “the most significant reform to Australia’s insolvency framework in 30 years”[3] but confined these to companies, and not protecting any personal liabilities, so as to “help more businesses in distress get to the other side of this crisis”, but, for many, only after 3 years or more.

In the meantime, Australia has been a party to the issue of international best practice for dealing with Covid impacted small businesses and their proprietors, which is far removed from Australia’s rather 19th century legally based approach in favour of company directors over sole traders.

Sole traders?

Sole traders might relish their perceived freedom and lifestyle, but can find it comes at a cost, which their corporate colleagues can often avoid. Whether it should be like this is another thing, but it seems the government would not have it otherwise.

[1] Hnry cites ‘ABS Counts of Australian Businesses, including Entries and Exits, 16-02-2021, issued annually’. More up to date figures are here: Counts of Australian Businesses, including Entries and Exits, July 2017 – June 2021 | Australian Bureau of Statistics (

[2] The bankruptcy system and the impacts of coronavirus | Attorney-General’s Department (

[3] This is incorrect.

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