Ready to become a sole trader and take on the world? Brilliant! But there are a few things you need to know before you get started.
If you’re a lone-wolf entrepreneur, you might be wondering if you should register as a sole trader. Spoiler alert: registering as a sole trader is not technically a real thing (although you may need to register for GST).
That being said, there are definitely a few important bits and bobs you need to think about before you start your own business. As well as coming up with a product/service and a viable business model, you’ll need to think about whether you should be a sole trader or a company, what taxes you’ll need to pay, and if you should get an NZBN. Got questions? We’ve got answers. Let’s get you up and running.
- What is a sole trader?
- Why be a sole trader rather than a company?
- Your tax requirements (because of course we’re going to talk about it, we’re Hnry)
- NZBNs - What are they and why have one?
What is a sole trader?
A sole trader is exactly what it says on the tin: a trader, who operates… well, solely. They’re business owners and operators who are solely responsible for every aspect of their business. For example, you’re the boss, but also the employee, the accountant, and the cleaner (sorry).
Sole traders have complete control over their business, including how big it gets, how it brands itself, and what major decisions it makes. You also have flexibility around how, when, and where you work, as well as how much you work. Not bad!
It’s important to note though, this flexibility might depend on your industry. A government contractor might be required to work during business hours, while a beekeeper selling honey at their local farmer’s market works the weekends, for example. It’s helpful to keep this in mind when you design your dream business.
Overall, starting a business as a sole trader is popular; it’s simple and flexible, with fewer rules and regulations to follow than if you were an industrial titan. It’s also pretty cost-effective to get started making it a great starting point for someone who doesn’t know where to begin, or who wants flexibility in how they work.
How to become a sole trader
Not to be a broken record, but all you really need to do in order to become a sole trader, is to trade. By yourself.
That’s pretty much it. If you regularly sell products or services for money, and you haven’t incorporated a company, you’re a sole trader. Congratulations!
But, while it really is that simple, there are a few things you’ll need to keep in mind.
As a sole trader, you’re also a business owner. That means you get to do all the fun stuff like choosing a business name, creating a logo, setting up a website, ordering business cards, and marketing your wares.
But it also means that you’re in charge of the more difficult things like business strategy, cash flow, investing in assets, and measuring results. How you do all this is up to you, but it’s always a good idea to have a plan – even if your business is as small as writing a few articles for a friend’s website every so often.
Secondly, you’ll need to have a good handle on how you operate. How long do you spend making your goods? Who are your suppliers? How much will you charge for this service? If you bake cakes as a side hustle, how do you price your cakes so that you’re actually being paid for your time?
Because you’re working for yourself, these decisions are entirely up to you. Many content freelancers, for example, are happy to take a hit in earnings in order to establish their brand and their work – but this may not be sustainable in the long run. Make sure you know where you want to start, and how you want to grow, so that you stay firmly in the driver’s seat instead of snoozing in the back.
Finally, there are a few different taxes and levies you need to stay on top of.
Sole trader taxes
As a sole trader, you’re entirely responsible for your own taxes.
In order to stay compliant, you’ll need to keep track of your income and your business expenses. From there, you can accurately calculate your:
- income tax
- tax deductions
- ACC levies
- GST returns (if you make over $60,000 in self-employed income across any given 12-month period)
- student loan repayments (if applicable)
- KiwiSaver contributions
If that sounds like a lot, it’s because it kind of is. Which is exactly why we started Hnry, a tax service specifically designed for sole traders. It’s like having an accountant in your pocket, helping you deal with your tax and financial admin.
With Hnry, you can focus on growing your business without worrying about getting tax calculations wrong. Hnry takes care of everything from tax to GST to student loans, and you only pay (a 1% fee capped at $1,500 a year) while you earn!
Sole Traders vs. Companies
There are a few key differences between being a sole trader, and operating as a registered company.
For starters, it’s generally easier and simpler to be a sole trader. It’s much cheaper to get started, you’ll have less tax administration to complete, you have simpler access to money made through your business, and you can trade under a business name and have an NZBN without registering a full company.
A potential downside of being a sole trader, however, is that you’re not as protected from business debts and obligations (although directors of companies may not always fully protected from liability either). If you’re found liable for a debt, your personal assets may be used to pay it off. However, you may be able to offset some of this risk through specific insurance policies.
Registering a company, on the other hand, means creating a separate legal entity responsible for its own taxes, profits, debts, and liabilities. It costs more upfront, and has higher amounts of tax administration, but makes it easier to take on partners and investors, for example.
One myth floating around the internet is that companies pay less taxes than individuals. While depending on your income this may technically be true – the company tax rate is a flat tax of 28% – this rate is only levied on company profits. To access the money in your company, you’d usually have to draw wages or declare a dividend, which should be taxed at your individual income tax rate anyway.
📖 For more information on tax rates, check out our guide created specifically for sole traders.
Sole traders vs. companies: pros and cons
|Cost-effective to get started||Higher costs to get started|
|Lower amounts of tax administration||Higher amounts of tax administration|
|Easier access to money flowing through business||Will need to conduct a legal transaction to access money, and pay tax at individual tax rate|
|Harder to take on investments/loans. Can’t take on business partners.||Easier to obtain investments/loans. Can take on business partners.|
|Potentially personally liable for business debt||Potentially less personal liability for business debt|
Registering for an NZBN
As an optional extra, you could register for a New Zealand Business Number (NZBN).
Getting an NZBN is not mandatory, but it can make your business more visible, save you time, and enhance your credibility. Some overseas clients may actually prefer it if you have one.
Reasons to register for an NZBN:
- Visibility: Having an NZBN means your business’s details are searchable in the NZBN register. This makes it easier for customers and suppliers to find you. It can also make it easier for you to do business with government agencies, as they may require an NZBN to register for certain services.
- Saves time: You can also use your NZBN to automatically pre-populate forms and applications with your business details.
- Enhances credibility: Having an NZBN can make your business appear more professional and established. This can help build trust with potential customers, suppliers, and other stakeholders.
- It’s free and easy to register: Registering for an NZBN is free and easy to do online through the NZBN website. All you need are your business details and a form of identification such as your driver’s license or passport.
Hnry makes sole trading easy
You could go at it alone… or you could join the thousands of sole traders who use Hnry.
Hnry is an award-winning tax and financial administration service for sole traders. For just 1% of your self-employed income, we will completely sort out your:
- Income tax
- ACC levies
- GST returns
- Student loan repayments
- KiwiSaver contributions
We also file your annual tax returns, as part of the service. And on top of all this, our app has an invoicing feature that helps you create, send, and manage invoices. No extra software required.
Whether you’re just starting out, or an industry veteran, Hnry is designed for all sole traders. We make sure that you never know the horror of an unpaid tax bill – ever. And that’s a big deal, believe us.
Start your sole trader journey off on the right foot, and join Hnry today.