What Is A Sole Trader?

8 February, 2024 | Tam Irvine

In New Zealand, a ‘sole trader’ refers to an individual who owns and operates their own business as the only owner. It is the simplest and most straightforward business structure. In New Zealand, sole traders have full control over their business, including management and profits. Unlike a company, there is no legal distinction between the individual and the business.

As a sole trader, you personally hold legal responsibility for every facet of your business, encompassing both debts and losses. It’s crucial to understand that in this structure, there’s no legal separation between the owner and the business entity, which means that personal assets might be vulnerable in scenarios where the business faces legal challenges or accrues significant debt.

Contractors and freelancers are considered to be sole traders unless they have registered their business as a limited liability company or another form of business structure.

Advantages of Being a Sole Trader

• Easy to set up & Less fees; Setting up as a sole trader is relatively easy, with fewer legal and tax obligations compared to companies. Registering as a sole trader in New Zealand is straightforward: choose a business name, register with the Inland Revenue Department (IRD), and you’re ready to start trading.
• Full Control: The sole trader has complete autonomy in business decisions and operations.
• Simplified Tax Filing: The tax requirements for sole traders are typically less complicated than those for companies. Income as a sole trader is taxed as personal income. You must declare your business income and can also claim expenses.
• Privacy: Financial & personal details of the owners are not publicly disclosed, providing more privacy than a company structure.
• Ease of Changing Structure: If the business grows, it’s relatively easy to transition to a different business structure.

 

Disadvantages of Being a Sole Trader

• Personal Liability – Sole traders have unlimited personal liability. This means if your business incurs debt or is sued, your personal assets, like your home or car, could be at risk. In contrast, self-employed individuals operating through a company enjoy limited liability, which protects personal assets from business risks.

• Financial Challenges – Access to capital can be more limited compared to other business structures.

 

What are the Legal and Compliance obligations for a sole trader? 

Tax & ACC
As a sole trader in New Zealand, you are required to register with the Inland Revenue Department (IRD) as a sole trader, and you will have to pay ACC levies as a self-employed person.

You’ll need to file an individual tax return each year, including your business income and expenses. You may also need to make provisional tax payments during the year.

You will need to register for Goods and Services Tax (GST) if your turnover exceeds NZ$60,000 in a 12-month period.

If you hire staff, you will need to register with IRD as an employer and pay PAYE on your employee’s behalf.

 

Business Compliance & Regulations
A sole trader is considered to be in business, and as such is required to meet all the standard legal requirements for a business providing goods and services. That means that you need to have the necessary permits and licences to run your business, you’re covered by legislation such as the Fair Trading Act, Consumer Guarantees Act, Commerce Act etc and any other legislation pertaining to your particular industry. It’s important to also consider your Health & Safety obligations.

 

Health & Safety
As a sole trader in New Zealand, you also assume the role of a ‘Person Conducting a Business or Undertaking’ (PCBU). This designation brings with it significant responsibilities, particularly in the realm of health and safety. Under the Health and Safety at Work Act 2015, as a PCBU, you are required to ensure, so far as is reasonably practicable, the health and safety of workers and others affected by the work carried out as part of your business. This includes providing safe work conditions, facilities, and systems of work, as well as adequate training, supervision, and monitoring to prevent work-related injuries and illnesses. Understanding and adhering to these responsibilities is crucial for the legal and ethical operation of your sole trader business in New Zealand.

Being a sole trader in New Zealand offers simplicity and control but comes with significant personal liability and responsibilities. Understanding these aspects is crucial for anyone considering this business structure.

Ensure your journey as a sole trader in New Zealand is legally sound and secure. Contact experienced commercial lawyer, Tam Irvine now for expert guidance and personalised advice tailored to your business needs.

 

Tam Irvine – Commercial Lawyer
Phone: 09 837 6837
tam.irvine@smithpartners.co.nz