Focus on sole traders
Setting up as a sole trader is a low-cost, straightforward way to start a business, which makes it a popular option for the first-time self-employed.
In fact, if you woke up tomorrow and decided to start a business on your own, you would automatically be classified as a sole trader until you chose a different business structure by entering into a partnership or incorporating your business as a company.
Your net profit is even taxed through your own personal IRD number on individual income tax rates, so it doesn’t get any simpler than this.
On this page:
- Definition of a sole trader
- Tax requirements for sole traders
- Important points about being a sole trader
A sole trader is a person who decides to start a business by trading on his or her own. Becoming a sole trader is the simplest way to get into business and requires the least cost, because it doesn’t involve any legal or formal processes in the start-up phase.
All you need is a personal IRD number, the right licences and permits (if applicable) and the right qualifications for your trade or profession, and you can start promoting your skills.
Find out about Regulatory authorities.
You’re responsible for all the debts and liabilities, but you also retain control of your business and the profits you make.
Typical sole traders include trades people, such as painters and decorators, electricians and repair technicians. Being a sole trader doesn’t stop you from employing people to help you in the business – all you have to do is register as an employer with Inland Revenue when you start employing staff.
Find out more with our Focus on employees.
Your net profit (total profit minus tax-deductible business expenses) is simply taxed at individual tax rates.
As your business doesn’t exist as a separate legal entity, in your first year of business all you need do is file a personal IR3 income tax return at the end of the financial year, just like any other individual who has to account for any non-salary or wage income. In your second year of business you may have to pay provisional tax.
All you’ve got to be careful of is making sure you keep a record of the money you take from your profits as living expenses. These drawings need to be carefully recorded for Inland Revenue so it clearly states which were for personal use and which were tax-deductible business expenses. For this reason, many sole traders use accounting software to accurately track their expenses.
Find out more about the Tax implications for different business structures.
Find out more about provisional tax with Overview of tax and levies.
- Because a sole trader’s business isn’t incorporated as a separate legal entity from its owner, you can be directly sued by an unsatisfied customer which could put your personal assets like your family home at risk.
- Unlike companies, sole traders can’t stop other businesses from using their name, but they can trade mark their brand as protection.
- It makes practical sense for sole traders to keep their personal and business accounts separate to make calculating their annual tax returns much easier.
Find out more about Starting a business.