Embarking on the journey of self-employment in New Zealand is an exciting step. For many budding entrepreneurs, choosing between a sole trader vs limited company business structure is the first pivotal decision. While some may consider forming a limited company, becoming a sole trader offers numerous advantages, especially for those just starting out. This article aims to highlight why opting for a sole trader structure is usually the better choice for newly self-employed Kiwis.
Simplicity in Setup and Management
Ease of Start-Up: As a sole trader, setting up your business is straightforward and involves less bureaucracy than forming a limited company. You can start trading immediately under your name, saving time and effort. You don’t need to register anything to become a sole trader, as long as you have a personal IRD number, you can simply begin earning income.
Streamlined Tax Filing: Tax filing for sole traders is much simpler. Your business income is treated as your personal income, which means you can file your tax through your personal tax return. You don’t need to also file a company tax return or deal with the complexities of taking money out of your company for personal use. Being a sole trader usually more than halves your tax management.
Flexibility and Full Control
Autonomy in Decision Making: Sole traders enjoy complete control over their business decisions. There’s no need to consult with other shareholders or directors, allowing for swift and autonomous decision-making.
Adaptability: Being a sole trader allows for more flexibility to adapt and pivot your business model as you learn and grow, which is crucial in the early stages of self-employment. And if things don’t work out, it’s also much easier to wind up a sole trader business.
Lower Start-Up Costs: Starting as a sole trader generally involves fewer initial expenses compared to setting up a limited company, which often incurs legal and registration costs. You also don’t need to open a business bank account (which usually have higher fees).
Reduced Ongoing Expenses: The administrative and compliance requirements for sole traders are minimal, leading to lower ongoing costs compared to the more complex requirements of running a limited company. With a limited company you will likely need to hire an accountant, who will also require you to pay for expensive accounting software. However for the majority of sole traders, compliance is simple enough that it can be managed without the need for an accountant.
Building Personal Relationships: As a sole trader, you’re the face of your business. This can be a significant advantage in service-based industries where building personal relationships with clients is key.
“Less Professional Image”: Some believe that sole traders are perceived as less professional than limited companies. However, professionalism is determined by the quality of your work and customer service, not just your business structure.
“Limited Growth Potential”: While sole traders may face challenges in attracting large investors, this structure doesn’t inherently limit business growth. Many successful businesses have flourished under sole trader setups.
“Sole traders cannot have staff”: One of the key misconceptions about being a sole trader vs limited company is that there are limitations on the hiring of employees. In New Zealand, sole traders have the ability to employ staff just like any other business structure.
The belief that the legal risk for being a sole trader is higher is not entirely a misconception; rather, it’s a matter of understanding the nature of the risk involved. It depends on the nature of the business, the level of risk involved in the industry, and how well the business is managed. Common risks involve causing client damages, defaulting on depts or contract disputes.
For many individuals, operating as a sole trader is not overly risky. Sole traders can mitigate some of these risks by taking out business insurance, such as liability insurance, which can provide a level of protection against certain types of legal action.
Empowering Your Sole Trader vs Limited Company Decision
Choosing to operate as a sole trader in New Zealand offers simplicity, control, cost-effectiveness, and a personal approach to doing business. These factors can be particularly helpful for those newly self-employed.
Remember, the journey of entrepreneurship is flexible. Many start as sole traders and transition to a limited company as their business evolves. The key is choosing a structure that suits your current needs while leaving room for future growth.
By understanding the benefits of being a sole trader vs limited company, you can make an informed and confident decision about your business structure. Embrace the simplicity and freedom that comes with being a sole trader and focus on what truly matters – growing your business and serving your customers.
For more info check out the tool for choosing a business structure on business.govt.nz
This is article 1 of 6 in our Self-employed Tax in New Zealand: A Beginner’s Guide.