Sole trader business structure in New Zealand
4 min read
Operating as a sole trader in New Zealand is a popular business route many Kiwis take. A lot of small business owners begin their business lives as sole traders. But what does a sole trader business structure look like and – if business is booming – how can you transition to another business structure or company structure?
If you’re interested in starting your own business, you’ll need to familiarise yourself with the sole trader business structure and how it operates.
What is a sole trader?
A sole trader, under New Zealand Government stipulations, is a business entity run by an individual.
Sole traders are generally people who start up a business on their own, without partners or trusts, and aren’t large enough yet to warrant registering as a company.
Most small business owners start out life as sole traders and when they become larger and more complex, they’ll migrate their business structure to other business types such as partnerships, trusts or companies.
Upsides to being a sole trader
- Simple and cheap to set up.
- You maintain control over the business and are the recipient of all profits.
- Losses can be offset against income.
- You can change business structures with relative ease as your operations evolve.
Downsides to being a sole trader
- You’re accountable for all debts incurred.
- Business growth can be tricky with this lean business structure.
- Courting and gaining finances from a bank, financial institution, or investors is more onerous.
Business structures in NZ
Not sure if a sole trader business structure is right for you? What are the different types of business structures available?
Before becoming a sole trader, it pays to understand the variances between the different types of business structures on the table, and which one suits you best.
The different business structures in New Zealand are as follows:
- sole trader
Each business type comes with its own set of expectations, complexities, legal concerns, opportunities, and liabilities.
The best way to navigate these business structure options is to use the NZ Government’s click-through questionnaire here.
You can also choose to consult with a business advisor, bookkeeper, or accountant to get expert advice on this choice.
Keep in mind, even if you start life as a sole trader, you can change business structures at any juncture you choose.
Becoming a sole trader
So, you’ve weighed up your options and decided to become a sole trader? Let’s unpack the steps involved in doing so.
Register as a sole trader in NZ
To register as a sole trader in New Zealand, you should be aware of the following registration requirements:
- You should first register your sole trader business by applying for a New Zealand Business Number (NZBN).
- If you’re earning over (or projected to earn over) the $60,000 GST threshold, you must register your sole trader business for GST.
- You must gain all necessary licenses, qualifications, and registrations pertinent to your vocation, trade, and particular business model. These will vary depending on whether you’re a carpenter, hairdresser etc.
- You’ll need a personal IRD number to pay your income tax and any applicable GST. Any sole trader who has been previously employed in New Zealand or has received a student loan should already have an IRD number.
- If you intend to employ staff in your sole trader business, you must register as an employer with the IRD.
- If you’ve created a unique product, trademark, copyright, or other form of intellectual property, you should register and protect this IP as soon as possible.
Sole trader tax
Sole trader tax concerns are the sole responsibility of the business owner. If you start life as a sole trader, you’ll have to calculate and put aside enough capital to cover your own income tax bill each financial year.
With the absence of a PAYE system (where your employer will withhold tax from your wage on your behalf), getting on top of your own tax is one of the most important responsibilities of a sole trader.
If you fail to anticipate your income tax bill and haven’t set this aside in a bank account for example, you may find yourself facing a large bill.
You’re taxed at the same rate as individuals as a sole trader. These rates can change, so always refer to the IRD’s tax calculators.
The best way to manage your own income tax is to utilise what’s known as ‘provisional tax’. Using this method means you pay your income tax at regular intervals throughout the year to avoid a single lump sum payment.
You can research your provisional tax options here, as there are four separate methods of calculating this.
Expenses and keeping records
It’s your responsibility to keep meticulous records in terms of your sales, net income, and business expenses.
Sole traders can claim back eligible business expenses to reduce their tax bill. It’s essential to keep invoices and receipts as proof for the IRD.
The best way to manage record keeping is by simply using the features of your cloud accounting solution and keeping it up to date.
Partnership business structure
If you’ve weighed your options and have decided going solo isn’t the right option for you, you can also enter the business world with a partner.
A partnership business structure has the advantage of shared responsibility and liability. If you have an associate and you’re interested in starting a simple business, a partnership may suit you better.
That completes our short guide to staring a sole trader business in New Zealand. A sole trader business structure is extremely simple and lean, allowing almost anybody with a great business idea to enter the world of self-employment.