8 Common Questions About Operating as a Sole Trader

If you’re about to set up a new business structure and are considering operating as a sole trader, it’s likely that you will have a lot of questions.

In this guide, we’ve compiled a list of common questions about operating as a sole trader. 

1. Can I later move between different business structures?

Certainly, changing from one business structure to another, such as from a sole proprietorship to a company structure, is generally simple. Many people start out as sole proprietors and then transition to other business structures as their businesses grow. Nonetheless, you must give your choice some thought. For instance, you may wish to ask the following questions:

• What primary reasons motivate you to alter your company’s organizational structure? 
• Have you considered the potential drawbacks of the proposed change in the corporate structure? 
• Are you aware of the financial and tax repercussions? 
• Do you know what sole trader insurance you will need in place as a sole trader?
• Has your accountant been consulted about your decision? 

Before making a choice, you must think through all the repercussions and legal requirements in detail.

2. What is a sole trader, and how is it different from being a self-employed person?

The fundamental distinction between being a sole trader and being self-employed is that one refers to the nature of your firm, while the other refers to your status as an independent contractor.

To put it another way, sole proprietors and self-employed people are very similar. This is due to the fact that many self-employed individuals select the sole trader business structure since it is simple and affordable to set up. For instance, independent designers and IT consultants are frequently sole proprietors. ​

Being a single proprietor means that you have total control over how your business is conducted and are accountable for everything that occurs there. You are not regarded as a self-employed person if you operate your firm as a corporation. Instead, you are both the employer and the owner of your own company. ​

3. What registration criteria must I meet if I operate my business as a sole trader?

To establish and register as a sole trader in New Zealand, you must do the following:

• To register your sole trader business in New Zealand, the first step is to apply for a New Zealand Business Number (NZBN).
• If your sole trader business is projected to earn or has already earned more than $60,000, you must register for GST.
• It’s essential to obtain all the necessary licenses, qualifications, and registrations relevant to your job, trade, or business model. The requirements will vary depending on the nature of your business, such as if you are a hairdresser or carpenter.
• To fulfil your tax obligations, including income tax and any applicable GST, you’ll require a personal IRD number. If you have previously worked in New Zealand or taken out a student loan, you should already have an IRD number.
• If you intend to employ staff for your sole trader business, you must register with the IRD as an employer.
• If you have created a unique product, trademark, copyright, or any other intellectual property, it’s advisable to register and safeguard it as soon as possible.

4. How do I handle the tax season as a sole trader?

Here are some great suggestions to help sole proprietors as tax season rolls around:

• ​Add up your business-related expenses.
• Separate your personal and commercial accounts at the banks.
• Recognize your tax obligations
• Set aside money to pay taxes.
• Use cloud-based accounting software to keep accurate records of your finances
• Employ a competent accountant

5. How do contributions to pension plans operate for sole traders?

You are exempt from contributing to an occupational pension plan for yourself if you work for yourself as a sole trader or in a partnership. ​

The decision to begin contributing to a personal pension plan must be carefully thought out, though. ​

Contributions to a personal pension plan would be done after tax, which would allow you to fund your pension right out of your checking account. The pension contributions you make throughout the tax year are consequently eligible for tax relief.

It is important to talk to a financial advisor about your pension contribution possibilities.

6. Can I recruit employees as a sole trader?

In a nutshell, you are able to recruit workers as a sole proprietor. You must abide by the same legal requirements that every other employer must meet as an employer. Making sure the individuals you hire are lawfully permitted to work in New Zealand, contributing to a pension plan, ensuring they receive their benefits, and making sure your workplace complies with any insurance and legal requirements are all very important.

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