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It can be intimidating to start a new business, particularly if you are launching a new product or service on your own account. While operating as a sole trader has advantages, it is crucial to ask yourself some key questions before getting started. Operating as a sole trader can involve a significant investment of time and resources and expose you to personal liability. Therefore, it is worth taking the time to conduct your due diligence. This article sets three questions to ask yourself before starting a new business as a sole trader. 

What Is Your Risk Appetite?

Operating as a sole trader usually means you are starting out in business or contracting on your own. A sole trader structure can minimise your start-up costs and is less complex than other structures, like companies. However, it does open up the possibility of your personal assets being at risk if your business fails. You need to objectively assess your personal risk appetite. You must also plan for what to do if the worst happens, and your business does not succeed. 

As a sole trader, you are personally responsible for the debts and liabilities that your business takes on. A common misconception is that sole traders benefit from limited liability, as companies do. Limited liability protects shareholders from taking on the debts of the company. However, sole traders do not have this advantage. Consequently, you should carefully weigh up your risk appetite and whether you are willing to take on those risks, especially when your business takes on debt. 

What Is Your Business Niche?

When starting a new business, it is important to ask what your business niche is. In other words, what is the unique problem that your business is solving? Alternatively, what unfilled demand in society or your community will you be meeting? The economy is a competitive place, and a useful place to start is to understand why a customer or client would come to your business instead of elsewhere. 

This does not necessarily mean that you need an invention or another innovation that nobody has seen before. Perhaps it is your own experience and networks that offer a unique selling proposition in the market. The key is to understand why your business will succeed and even have a path for growth. To help work out your business niche, you should consider drafting a business plan. It can be short – even less than a page. But developing a business plan can help you work out what your niche is and objectively evaluate your business’ growth prospects. 

Who Is Your Competition?

No matter what your product or service is, it is likely you will have competitors. Understanding how those competitors work, what they offer and how they might differ from your own product or service is essential. For instance, you need to work out what your competitors charge and how much customers are prepared to pay for the product or service. You should also weigh up the industry standards for your new business. 

Another thing to keep in mind is that sole traders can find it more difficult to grow their business relative to other structures. Financial institutions and investors prefer working with companies, particularly given the limited liability benefits and reduced liability company exposure. You could consider restructuring as a company as your business grows to better position your business against medium or large competing businesses.

Key Takeaways

It is easy to start a business as a sole trader in New Zealand. There are other advantages with the business structure, including low start-up costs, few compliance costs, and some flexibility. However, you should ask yourself some key questions before starting business as a sole trader. You should consider what your risk appetite is, especially given the potential liability faced by sole traders. You should also think about some strategic dimensions of your business, like what your business niche is and ensuring you understand your business’ competition. If you want to know more about beginning your business as a sole trader, contact LegalVision’s commercial lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What is the potential liability for sole traders?

Sole traders do not have limited liability, like the shareholders of a limited liability company do. This means that you are liable for any debts or other liabilities your business takes on. As a result, your personal assets may be at stake.

Is it harder to get loans or further investment as a sole trader?

Yes, it is typically more difficult to get loans, investment or financial support as a sole trader. You could consider restructuring as a company as your business grows to better position your business for significant loans or further investment.

Should sole traders have a business plan?

Yes, sole traders should have a business plan just like most companies would. Having a clear idea of your product or service, your business niche, and your strategy for the future is always useful when managing your business.

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