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If you are looking to start a business in New Zealand, the first thing you need to consider is how you are going to structure it. In New Zealand, you can operate as a sole trader, partnership or company.

Each business structure comes with its own set of benefits and drawbacks. As a business owner, you may also find that not every structure will apply to you. This article will explain what a sole trader is and outline the advantages and disadvantages of this structure.

What Is a Sole Trader?

A sole trader is a type of business structure where you are the only owner of your business. It is suited for small businesses or businesses that are just starting out. Sole traders are a common business structure in New Zealand and are often used before businesses evolve into partnerships or companies. As the owner of a sole trader business, you must pay tax on any income you receive from the business at the relevant tax rate. You only need to register for GST if your business earns over $60,000.

Advantages of Being a Sole Trader in New Zealand

Cheap and Easy to Set Up

The main advantage of a sole trader structure is that it is easy to set up. There is no need to register it on the New Zealand companies register and requires minimal paperwork. It is also cheap to set up as there are no registration fees. The only fees you will have to pay are to set up a bank account. You might also need to pay for any financial management software that you use. Therefore, the lack of fees and paperwork makes being a sole trader an attractive option for new businesses. 

Full Control

Another advantage of being a sole trader is the degree of control you will have over it. As a sole trader, you are the only owner of the business so you are responsible for all decisions. There is no board of directors to answer to, and you are only accountable to yourself. This means that you can change the business as you see fit.

Disadvantages of Being a Sole Trader in New Zealand

Unlimited Liability

The biggest disadvantage of setting up your business as a sole trader is that you will have unlimited liability. This is because your business is not a separate entity from yourself. Unlimited liability means that you are responsible for all business debts as the owner of the business.

If you are unable to pay your business debts as a sole trader, then you may have to sell your personal assets to pay them off. 

More Difficult to Grow

Another disadvantage of operating with a sole trader structure is that it can make it difficult to grow a business. This is because the sole trader structure is more ideal for small businesses. Once your business starts to get larger, you also have the option to become a company. This will allow your business to establish a board of directors, and add further checks and balances when it comes to governance. 

Harder to Sell

Setting up your business with a sole trader structure can also make it harder to sell once the time comes. As mentioned before, a sole trader business is not separate from its owner. This means it will usually be intertwined with your personal assets. Therefore, if you want to sell your business, you should change it into a company. You should also change your business into a company if you want to list it publicly. 

Key Takeaways

Choosing the right business structure is a crucial part of any business especially during the startup phase. Business structures all have distinct traits. Therefore, the structure you choose should reflect the best fit for your business. 

Most businesses will start out as sole traders. The main reason for this is because sole traders are easy to set up and do not require large outlays. However, sole traders are not the best when you are trying to grow your business. You will have unlimited liability, meaning you are personally liable for any business debts. For legal assistance with choosing your business structure, contact Legal Vision’s business lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Can I change business structure?

You can change your business structure as long as you process the correct paperwork and follow all the necessary obligations.

Is it possible to sell a sole trader business?

You can sell a sole trader business but it can be more difficult. Potential purchasers may also be less willing to buy it under this structure. 

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