Congratulations on your decision to start your own business in 2023! As a sole trader, you can operate your business independently without partners or employees. Sole traders are commonly referred to as the “self-employed” because they take ownership and responsibility for all aspects of their business, including tax payments and record-keeping. This article will provide you with insight into the details of becoming a sole trader, including registration, legal requirements, payment methods, tax obligations, employee considerations, and other important factors.
First, let us begin with explaining what being a sole trader means. A sole trader is an individual who owns and runs their own business. Unlike a company owner, there is usually no legal distinction between the business and the individual. This means that as a sole trader, you are responsible for any debts or losses incurred by your business. However, you get to keep all profits after tax, which is unlike in a company where profits are usually shared among shareholders.
As a sole trader, there are a few things to keep in mind before starting your business. You will need to register your business with the relevant authorities in your country, such as the Companies Office in New Zealand or the Australian Securities and Investments Commission (ASIC) in Australia. Additionally, you will need to have a business bank account to separate personal and business finances, and include your business name on all marketing materials, websites, and social media accounts. If you use a trading name, you will also need to register it with the relevant authorities.
Sole traders have the flexibility to pay themselves by either salary or dividend. However, paying yourself a bonus can result in higher taxes in the long run, so it is important to weigh the pros and cons of each payment method. As a sole trader, you can claim tax deductions for any expenses wholly and exclusively incurred while running your business. This includes costs related to the office, travel, marketing, as well as using your home as an office.
You can also employ people as a sole trader, but will need to comply with employment laws and pay their taxes and superannuation. Being a sole trader has advantages and disadvantages. The main benefits include flexibility, full control over the business, and low start-up costs. However, the main disadvantage is that you are personally liable for any debts or losses incurred by the business, which can put your personal assets at risk.
Deciding whether to become a sole trader or company owner depends on many factors including the size of your business, the amount of investment you need, and your comfort level with personal liability. If you are starting a small business and do not require a lot of investment, becoming a sole trader may be the best option. However, if you are starting a larger business or need investment from shareholders, being a company owner may be more appropriate.
In conclusion, as you start your journey as a sole trader, make sure to research and understand all the pros and cons of your decision. Seek professional advice from an accountant or business lawyer if you are ever unsure of which structure is appropriate for your business. Good luck on your entrepreneurial journey!