So you want to start your own business in 2023? Well done. Today you get started as a sole trader and operate your business independently without other people.
Sole traders are often referred to as ‘self-employed’ because they run their own businesses rather than being employees of a larger organization. They are responsible for everything that happens within their business, which includes paying taxes and keeping records.
There are other entities you can use for your business; however, in this BusinessBlog article, we’ll explain the ins and outs of being a sole trader, including:
- Sole Trader explained
- Legal stuff
- Getting paid
- Tax requirements
- Taking on employees
- Other considerations
Ins and Outs of Being A Sole Trader
Let’s commence with explaining the sole trader status.
What Is a sole trader?
A sole trader is someone who owns and runs their own business. As a sole trader, you’re in charge of all aspects of your business, from finding customers and doing the work to keeping track of your income and expenses and paying taxes on your profits.
Being a sole trader is different from being a company owner, as there’s no legal distinction between you and your business. This means you’re personally responsible for any debts or losses incurred by your business. It also means you get to keep all the profits after tax – unlike in a company, where profits are shared among shareholders.
Key elements of becoming a sole trader
Here are a few key things to remember if you consider becoming a sole trader.
You’ll need to register your business with the relevant authorities – in New Zealand, this is the Companies Office, and in Australia, it’s the Australian Securities and Investments Commission (ASIC).
You’ll need a business bank account to separate your personal and business finances.
You’ll need to put your business name on all marketing materials, websites, and social media accounts. As a sole trader, you can choose to operate under your own name or use a trading name. A trading name is a business name different from your personal name. You’ll need to register a trading name with the Companies Office or ASIC if you use a trading name.
To employ people, you’ll need to comply with employment laws and pay their taxes and superannuation.
How do sole traders pay themselves?
Sole traders can choose how they want to be paid by salary or dividend. A stipend is an amount you agree to pay yourself each month, just like an employee would be paid.
A dividend is a distribution of profits from your business that you can take as cash or reinvest back into the business. The advantage of taking a bonus is that you only pay tax on the money once – when you withdraw it from your business account. The downside is that you might end up paying more tax overall, as dividends are taxed at your personal tax rate (which could be higher than the company tax rate).
What are the costs of becoming a sole trader?
The cost of becoming a sole trader varies depending on the country you’re in and the type of business you want to start.
For example, there is no fee to register as a sole trader in New Zealand – you can do this online through the Companies Office website. Whereas in Australia, there is a $50 fee to register as a sole trader with ASIC. You’ll also need to pay an annual registration fee, which is currently $87 for businesses with a yearly turnover of less than $10 million.
Suppose your turnover is more than $10 million. In that case, you’ll need to pay a higher annual fee – currently $360 for businesses with a turnover of between $10 million and $100 million and $1800 for companies with a turnover of more than $100 million.
What can sole traders claim tax on?
As a sole trader, you can claim tax deductions for any expenses incurred ‘wholly and exclusively’ while running your business. This includes the cost of goods sold, office expenses, travel expenses, and marketing expenses.
You can also claim deductions for using your home as an office – for example, if you have a dedicated home office or workspace or use part of your home to store stock or equipment. To claim these deductions, you’ll need to keep records of your expenses and how they relate to your business.
Can sole traders hire employees?
Yes – as a sole trader, you can employ people in your business. You’ll need to comply with employment law and pay their tax and superannuation.
You can pay your employees by salary or wage or contract them to do specific tasks or projects. If you’re paying an employee by salary or compensation, you’ll need to withhold tax from their pay and deliver it to the government on their behalf.
You’ll also need to make compulsory superannuation contributions for your employees – currently 9.5% of their gross salary or wages. These contributions are paid into a superannuation fund, a savings account used to provide income for employees when they retire.
What are the pros and cons of being a sole trader?
One of the main advantages of being a sole trader is that you have full control over your business – you don’t have to answer to anyone else, and you can make all the decisions about how your business is run.
Another advantage is that it’s relatively easy and cheap to set up as a sole trader – in most cases, you can do this online in just a few minutes.
The main downside of being a sole trader is that you’re personally liable for all debts and losses incurred by your business. If your business is sued or can’t pay its debts, your personal assets – like your home or savings – could be at risk.
Another downside is that raising money as a sole trader can be more challenging than it is for a company. This is because potential investors are more likely to invest in a business structured as a company, as they’re not personally liable for the business’s debts.
Should you start your business as a sole trader?
Whether to start your business as a sole trader or a company depends on many factors – including the size and nature of your business, how much money you need to raise, and whether you’re comfortable with the level of personal liability involved.
Choosing between sole trader and company can be tricky; however, you can access information on legal entity structures per country online. For example, for New Zealand residents LegalVision has a comprehensive write-up on the two most popular business structures if you’re looking for extra advice before choosing the best entity for your new business.
If you’re starting a small business and don’t need to raise much money, then being a sole trader could be your best option. This is because it’s relatively easy and cheap to set up as a sole trader, and you have complete control over your business.
However, setting up as a company may be a better option if you’re starting a more significant business or need to raise capital from investors. This is because companies can offer shareholders limited liability, which means they’re not personally liable for the business’s debts.
Whatever structure you choose for your business, make sure you understand the pros and cons of each option before making a decision. And if you’re ever unsure about which structure is appropriate, seek professional advice from an accountant or business lawyer.