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One of the best ways to set up your small business is to become a sole trader. Structuring your business as a sole trader allows you to take advantage of a raft of benefits and is the easiest way to structure a business. However, without understanding all the legal requirements, you risk failure before you have even begun trading. Importantly, having the correct documentation is essential. This article will outline four documents to get started as a sole trader in New Zealand.

Advantages and Disadvantages of Sole Traders

A sole trader is a structure that allows you to set up a business without forming a company. It is one of the most popular business structures in New Zealand and continues to be the structure of choice for many businesses. However, like all business structures, it has its share of advantages and disadvantages.

Advantages Disadvantages
It is easy to set up a sole trader as there is no formal registration process. A sole trader has unlimited liability, meaning you are responsible for paying back all debts. If your business becomes insolvent, creditors could take your personal assets to pay back debts.
Sole traders are cheap to set up and maintain. More difficult to grow when compared to a partnership or company.
You are the sole decision-maker of the business. Harder to sell a sole trader business as it is not a separate entity.
You receive all shares of any profit you make from the business. Banks and finance companies are less likely to loan to you.

Tax Documentation

You must be aware of all of your tax obligations before you set up your business, regardless of the business structure you are adopting. Accordingly, there are two key tax documents to note, namely:

  • income tax; and
  • goods and services tax.

Income Tax

As a sole trader, you are entitled to all the profits that your business makes. This means that any profit distribution to yourself will be taxed at the applicable income tax rate. Therefore, every year you must file an income tax return form (IR3). This document outlines the number of business expenses you are claiming and the relevant income that you receive.

Goods and Services Tax

Another type of tax that a business must pay is goods and services tax (GST). GST is currently 15% in New Zealand, and you usually add this amount to the price of your goods and services. Importantly, if you earn more than $60000 in a year, you must register for GST. You will be liable to fines if your business is eligible and you do not register. 

Additionally, you can register for GST on the Inland Revenue website, stating details like:

  • IRD number;
  • bank account; and 
  • the business’ turnover.

Employment Agreement

As a sole trader, a further document you might need to prepare is an employment agreement. If you are starting your business, you may not be looking at employing anyone. However, it is still crucial that you prepare an employment agreement. It may not be long before you feel the need for more personnel to help your business. 

An employment agreement is a legally enforceable document that governs the relationship between an employee and an employer. Additionally, it should contain key clauses for it to be effective. Some of these clauses are:

  • details of the parties;
  • intellectual-property considerations;
  • dispute resolution practices; and
  • leave entitlements

Employees are legally entitled to certain benefits, so your employment agreement should reflect these.

Lease Agreement

Your business may need a separate space other than your home to operate. So, a lease agreement governs your entitlements when leasing premises. A lease agreement is a legally binding contract between a landlord and your business. It is an essential document outlining what you can do with the premises, such as painting and what chattels the landlord will provide. Likewise, it should also contain the price and length of the lease. 

In addition, commercial lease agreements are typically long term and can last as long as 12 years with periodic rent increases. Keep this in mind before signing a lease agreement.

Licences

Finally, your business might need a licence to operate. The most common licence is a liquor licence. This allows a business to either serve or sell liquor to its consumers. Other businesses that require licences are security personnel and pawnbrokers. Licences allow the government to regulate an industry that it feels could be harmful to consumers if no standards are in place.

Key Takeaways

Starting your business as a sole trader is one of the best ways to get your business off the ground without having to fork out a significant amount of expenditure and time. However, there are certain documents that you must prepare before starting to operate your business. As a sole trader, the main documents you need are:

  • tax documentation;
  • an employment agreement;
  • a lease agreement; and
  • licences.

These documents are there to help govern relationships either with stakeholders or the government. For legal assistance with getting on top of your documents as a sole trader, contact LegalVision’s business lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What happens if I pay the wrong type of tax?

If it is a minor offence, you may be let off without a fine. However, if it is seen as a deliberate offence, you risk conviction.

Do sole traders have to register with the government?

No, there is no legal registrar for sole traders. However, you must have an Inland Revenue number if you are a sole trader.

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