What is a sole trader?
If you’re a sole trader (also called a sole proprietor) you’re the single owner of your business. You have no partners or directors, nobody looking over your shoulder (except maybe a helpful accountant). You’ve got complete authority over every aspect of your business. It’s your empire. You don’t have to run things solo to be a sole trader – you can hire employees. In other words the sole refers to the number of owners, not the number of people working in the business.
Many small businesses start off as sole traders. It’s also an easy option for contractors and self-employed people. As they grow they might decide to change their structure to a partnership or company.
Pros and cons of being a sole trader
If you choose to set up your business as a sole trader - as opposed to a partnership or company - there are some clear benefits.
- Startup costs are minimal - there are no registration or legal fees to set up your business structure as a sole trader
- As mentioned above, it’s all yours - the profits (and the losses)
- You get some of the same government benefits an employee might get eg, parental leave
- Your business income is regarded as personal income and tax is handled through your personal IR account, which is nice and simple
But as with any business structure there are some downsides.
- The debts and liabilities are your personal responsibility and this may put your personal assets at risk if the business fails
- You’re responsible for paying ACC levies for yourself and any employees
- If want to sell a stake to investors to get business finance, you’ll have to change your business structure
- If you want to sell the business this can be more difficult – especially if you have something that’s very niche – as you need to find someone willing to take over your unique dream
How to register as a sole trader
The process of registering as a sole trader is very simple. To become a sole trader you must:
- have a personal Inland Revenue (IRD) number for paying income tax and let IR know you’re becoming a sole trader
- register for GST with IR, if your business earns (or is likely to earn) more than $60,000 a year
- register as an employer with IR, if you have employees
- have any government licences and permits that your business might need
- have any qualifications or registrations required for your trade or profession
- pay ACC levies
Inland Revenue (IR) tasks
The bulk of tasks to register as a sole trader are done through Inland Revenue. And they’ll send your details to ACC for that part of your business set-up.
If you already have an IRD number – and you probably do if you’ve been in any employment, or have a bank or KiwiSaver account – all you need to do is let IR know that you’re now a sole trader.
Register for GST
If your business earns more than $60,000 a year (or is likely to earn in the next 12 months), you need to register for GST with IR. You can get into legal difficulty if you don’t register for (and collect) GST when you should.
You can also register for GST if your business earns $60,000 or less a year. Being registered allows you to claim back the GST you’ve been charged for some of the goods and services you use for your business.
Register as an employer
You’ll need to register as an employer with IR if you take on staff. IR will ask if you need to register for fringe benefit tax (FBT) if you provide employees with certain benefits, and the employer superannuation contribution tax (ESCT). The ESCT is deducted from contributions you make to any employees’ KiwiSaver.
Licences and permits
You may need licences or permits from central or local government bodies to legally operate your business. For example, you might need a food licence if you’re going to be running a food business, or an alcohol licence if you’re selling alcohol. Check with your local government website or the Compliance Matters website.
Professional qualifications or registrations
Depending on your business, you may need a professional qualification or registration. For example, if you want to operate as an electrician you need to be registered and licensed with the Electrical Workers Registration Board (EWRB). If you want to run your own physiotherapy business, you must be registered and hold a current Annual Practising certificate issued by the Physiotherapy Board. Check with your industry bodies for their requirements.
As a sole trader you’re regarded as self-employed. You’ll be automatically enrolled in New Zealand’s ACC CoverPlus program, which will provide weekly compensation if you have an accident and can't work. IR passes your income details on to ACC so you don’t need to contact them directly. If you become an employer, IR will pass on your payroll details to ACC.
The levies you pay for yourself and any employees will be based on the type of work you do and your liable earnings. It won’t hurt to check with ACC that they have those details correct. You can register for MyACC for Business to manage your account and levies online.
You’ll get your first ACC levy invoice after you’ve filed your tax return with IR. Then you’ll be invoiced once a year, usually in July or August.
You don’t have to register your business name or trading name if you’re setting up as a sole trader. Your business name can be your own legal name – Moana Bradley, for example. Or you can have a trading name that customers know you by – ‘Moana Bradley Plumbing Services’. Just don’t use restricted words or infringe any trade marks. Use OneCheck to check on available names, trade marks and domain names.
Optional: NZ Business Number
As a sole trader you can also apply for a New Zealand Business Number (NZBN). This is a unique identifier, which any business in New Zealand can have. Your NZBN will link to your core identifying information such as trading name, phone number and email. Having an NZBN will speed up your dealings with the government, suppliers and customers, and other businesses, eg. when sharing invoicing details. They can look up your information and you won’t need to repeat it or update it in multiple places.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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