Sole trader
A sole trader is the simplest way to run a business in New Zealand. Here's how it works.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- A sole trader is one person running a business under their own IRD number, with no legal separation between them and the business
- You keep all the profits and control, but you take on unlimited personal liability for the debts and obligations of the business
- You pay income tax at individual rates through an IR3 return, register for GST once your turnover passes $60,000, and pay ACC levies and provisional tax where they apply
- You can move to a company structure later if you want limited liability, more credibility with lenders, or room to grow
What is a sole trader?
A sole trader is a person who runs a business as an individual, using their own IRD number, with no legal separation between themselves and the business. It's the simplest and most common business structure in New Zealand, and you can start trading under your own name straight away.
As a sole trader you make all the decisions, keep all the profits after tax, and take personal responsibility for any debts. You can still hire staff and contractors, and you can register a trading name if you'd rather not trade under your legal name.
Advantages of being a sole trader
Being a sole trader suits many new business owners because it's quick to start and easy to run. The main advantages come down to simple setup, full control, and straightforward admin.
- Start trading quickly, with no company registration or formal filing to complete first
- Keep setup and running costs low, since there's no Companies Office registration or annual return fee
- Make decisions on your own, without needing to consult partners, directors, or shareholders
- Keep all the profits after tax, rather than sharing them across owners
- Handle simpler admin, with your business income reported on one individual tax return
Disadvantages of being a sole trader
The trade-off for that simplicity is that you carry the risk personally. Weigh these disadvantages before you decide the structure is right for you.
- Accept unlimited liability, so your personal assets can be at risk if the business runs up debts or faces legal claims
- Find it harder to raise finance, as lenders and investors often prefer a company structure
- Face limits on growth, because you can't bring in shareholders or sell a stake in the business
- Miss out on income splitting, since all business profit is taxed as your personal income
You can manage some of this risk by taking out business insurance suited to your trade, so a single claim is less likely to reach your personal finances.
Sole trader tax obligations in New Zealand
As a sole trader your business income is taxed as your personal income, and you're responsible for sorting your own tax with Inland Revenue (IRD). The main obligations to plan for are income tax, GST, provisional tax, and ACC levies.
Income tax and your IR3 return
Your business profit is added to any other income you earn and taxed at the individual income tax rates set by the IRD. After the tax year ends on 31 March, you report your income and expenses in an IR3 individual income tax return.
- Use your personal IRD number for the business, rather than a separate business number
- Claim deductions for legitimate business expenses, including business use of your home worked out with the IRD square metre rate or actual costs
- File your IR3 by 7 July, or later if you use a tax agent with an extension of time
GST, provisional tax, and ACC levies
On top of income tax, a few other obligations kick in depending on your turnover and how much tax you owe. Check each of these as your business grows.
- Register for GST once your turnover passes $60,000 in any 12 month period, then charge and return GST at 15%
- Pay provisional tax in instalments during the year if your residual income tax was more than $5,000 in the previous year
- Pay ACC levies each year, which cover you for work related injury based on your self-employed income
How to set up as a sole trader in New Zealand
You become a sole trader as soon as you start trading, so there's no formal registration to create the structure itself. Work through these steps to register your business and meet your tax obligations.
- Use your personal IRD number for the business, or apply for one through the IRD if you don't already have one
- Choose whether to trade under your own legal name or a trading name, and get a free New Zealand Business Number (NZBN) if you'd like one
- Register for GST with the IRD if your turnover passes $60,000, or if you'd like to register voluntarily
- Check whether your industry or location needs any licences or permits before you start
Sole trader vs other business structures
New Zealand has four common business structures: sole trader, partnership, company, and trust. Comparing them helps you see when to stay a sole trader and when another structure might fit better.
Sole trader vs partnership
A partnership is similar to being a sole trader, but two or more people share the business. The main differences are how ownership and liability are shared.
- Share ownership, decisions, and profits across the partners, rather than keeping them to yourself
- Take on liability together, as each partner is personally responsible for the debts of the partnership
- File a partnership return, then report your share of the income in your own individual tax return
Sole trader vs company
A company is a separate legal entity from its owners, which changes how liability, tax, and credibility work. It takes more admin to run, so it tends to suit businesses with higher risk or growth plans.
- Gain limited liability, so your personal assets are generally protected from business debts
- Pay company tax on profits and file an IR4 return, separate from your personal income tax
- Build added credibility with clients, lenders, and investors who prefer an incorporated structure
- Take on more admin and cost, including Companies Office registration and an annual return
A trust is a fourth option, mainly used to hold assets and manage how income is distributed. It's the most complex structure to set up and run, so most new businesses start as a sole trader or company.
When to choose a sole trader structure
A sole trader structure works best when you want to keep things simple and your risk is low. Consider it if the following describe your situation.
- Run a low risk service business with limited liability exposure
- Test a new business idea before committing to a company
- Prefer simple admin without directors, shareholders, or formal meetings
- Want full control and flexibility over your day to day decisions
Manage your sole trader finances with Xero
Running a business on your own means you handle every part of the money side, from tracking income and expenses to getting ready for your IR3. Good accounting software for sole traders keeps that work organised so you can spend more time on the business itself.
Xero online accounting software brings your finances together in one place and takes care of routine tasks for you.
- Connect your bank so transactions flow in and reconcile with less manual entry
- Track expenses and capture receipts on the go, ready for tax time
- Return GST straight to the IRD from Xero once you're registered
- See how the business is tracking with clear, real time reports
Keeping on top of your finances doesn't have to be complicated. Xero simplifies your sole trader accounting so you can focus on growing your business instead of managing paperwork, and you can get one month free to try it.
FAQs on sole traders
Here are answers to some frequently asked questions about sole traders in New Zealand.
Do I need an NZBN as a sole trader?
No, an NZBN is optional for sole traders, but it's free and can make it easier to deal with other businesses and government agencies. You can apply for one online through the NZBN website.
When do I have to register for GST?
You must register for GST once your turnover passes $60,000 in any 12 month period. You can also register voluntarily below that threshold if it suits your business.
Can I employ staff as a sole trader?
Yes, you can hire employees and contractors as a sole trader. If you take on employees, you'll need to register as an employer with the IRD and manage PAYE on their pay.
Related terms
Learn more about sole traders
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.
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