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Becoming a sole trader
Being a sole trader is an easy way to start a business, work for yourself or work as a contractor for someone else, but isn’t for everybody. If you want to become a sole trader or you’ve done this and aren’t sure what it involves, here’s where you can find tips and information to help.
Starting out
It’s relatively easy to start a business as a sole trader — you don’t need to go through a legal process or to register yourself or your business with a government agency.
Going it alone means you control your business, and get to keep all the profits. You get some of the same benefits employees get, eg paid parental leave. But you will miss out on other things, eg paid sick leave or bouncing ideas off teammates.
Being a sole trader appeals to a wide range of people, including:
- tradespeople, eg plumbers, house painters and electricians
- contractors who work for other organisations, eg IT consultants and builders
- small business owners, eg hairdressers and landscape gardeners
- people who turn a hobby into a business, eg artists and furniture makers.
Talk to people in the industry you want to work in to find out if it’s for you.
If you might want to sell your business or get investors at some stage, it’s best to have a company structure from the start. Use our Choose Business Structure tool to help you decide.
Choose your business structure
Is sole trader the best structure for your business? Use our Choose Business Structure tool to check that it’s right for your business’s needs. Just three quick questions and you’re on your way.
Before you start
Make sure you have a clear idea of why you want to be a sole trader and what you want from it. Being a sole trader can be a flexible way to work. You’re your own boss. But you may also be your entire staff, too.
Use our tips and tools to test your business idea or work out what you want to earn contracting.
Talk to people who have chosen the structure you’re considering. Think about getting an advisor, eg a lawyer or accountant who specialises in your industry.
What you need to do
To become a sole trader you must have:
- a personal IRD number for paying income tax and GST
- government licences and permits that your business needs
- qualifications or registrations for your trade or profession.
You’ll need to tell Inland Revenue you’ve become a sole trader and you’ll need to register for GST if you earn over $60,000 a year.
You can also get a New Zealand Business Number (NZBN), a unique identifier, which any business in New Zealand can now have. Using it will speed up your interactions with government, suppliers and customers, and other businesses, eg when sharing invoicing details.
Get an NZBN(external link) — New Zealand Business Number
Intellectual property
It’s never too early to think about intellectual property (IP), which includes your logos, trade marks and inventions. When you protect IP you’re safeguarding the time, money and effort you put into a business.
Sole traders can’t advertise using their personal name if someone has already registered it as a trade mark in the same industry.
IP will be important throughout your business’ lifespan. So make sure you understand what it is and why it’s important.
Check whether your name has been registered as a business name, trade mark, web domain or social media username with our ONECheck tool.
Staff
You can hire staff, but you must be registered as an employer with Inland Revenue and meet certain obligations. Most sole traders start out as the only person working in their business. That means you’re responsible for your dealings with government agencies, eg ACC and Inland Revenue.
Anti-money laundering rules
You might need to meet rules to detect and prevent money laundering and the financing of terrorism if you’ll be doing one or more of these tasks:
- managing money or assets for clients
- providing trust or company services
- selling real estate
- providing conveyancing services
- handling large amounts of cash.
These rules affect the records you need to keep and how you must ID customers.
Get advice
People often become sole traders because they have certain skills that they want to make a living from. However, you can’t be an expert in all areas of business, eg day-to-day finances or business planning, as well as your specialist area — and you shouldn’t have to try to. Think about getting advisors, eg accountants, mentors and lawyers, to help you from an early stage.
Don’t be surprised if your accountant or lawyer asks to check your ID.
It’s to comply with anti-money laundering rules.
Understanding your finances
As a sole trader, whether you’re contracting or have your own business, you’re responsible for all work-related debts, eg what you owe your suppliers, ACC and Inland Revenue.
Before you start your business, check out options to manage your finances, for example online accounting software, or working with an accountant or bookkeeper.
If you can’t pay your debts on time, it’s important to act fast. Talk to those you owe money to — they may agree to a more manageable payment plan. Also check if you are getting paid on time.
If your debts get too big, you may risk losing assets like your car or home. It helps to talk to an accountant or lawyer before you start your business. Ask about ways to protect your home, eg putting it in a trust.
You can draw funds from your business’ profits as you need them for personal use. But make sure you keep a record of money taken from any work accounts for your living expenses.
GST
If you think you will earn more than $60,000 a year, you must register for goods and service tax (GST).
GST of 15% is added to the price of most things you buy and sell. If you’re GST registered, you can claim back GST you pay on things you buy for your business. You can also charge GST on what you sell, which is collecting it on the government’s behalf.
You can choose to voluntarily register for GST even if your annual turnover is less than $60,000. If you’re not sure you’ll earn more than $60,000 in a year, talk to an accountant about whether it’s worth it.
Registering for GST(external link) — Inland Revenue
Income tax
Paying income tax as a sole trader can be straightforward. Get it right and you can qualify for a first-year tax discount. But get it wrong and you may have to pay penalties.
Your net profit — what you earn after paying work expenses — is taxed through your IRD number according to how much you’ve earned in your financial year. While you’re working as a sole trader, you must file an IR3 income tax return at the end of each tax year.
If you pay all your first-year income tax before the financial year-end on March 31, you may qualify for a 6.7% income tax discount. Talk to an accountant about how you can do this.
Provisional tax
You may have to pay provisional tax in your second year. This means paying your income tax in instalments during the year. The amount of provisional tax you need to pay is based on your expected profit for the year or your GST.
Contractors
Contractors aren’t employees, so if you’re contracting you won’t have PAYE — pay as you earn tax — deducted from your income.
Some contractors, eg who work in areas of the horticulture or film sectors, who receive schedular payments are subject to a flat-rate tax. You may also be able to arrange with your employer for them to pay you schedular payments so tax can be paid as you get paid.
Understanding schedular payments(external link) — Inland Revenue
Keeping records
You must keep accurate and complete work records for at least seven years. This includes banking information, proof of your income — including cash income — expenses, invoices and cashbooks.
Paying tax your first year in business(external link) — Inland Revenue
Sole trader expenses and records(external link) — Inland Revenue
Expenses
You can claim back many of the expenses you incur while you’re doing day-to-day business to help reduce your tax bill. It pays to understand what you can and can’t claim for. Test your knowledge by taking our quiz.
Whether you’re a sole trader, contracting, in a partnership or own a company, you can claim business expenses to reduce your tax bill. Take this quiz to find out what you can claim for, and how much. When you’re done, follow the links in the answers for more details.
ACC
When you start out as a sole trader, you automatically get ACC personal injury cover from day one. It’s called CoverPlus. What you pay will be based on the type of work you do and your liable earnings.
You can choose to change to CoverPlus Extra which gives you more control over how much of your income you want ACC to cover, and means you can lower the levies you pay.
Your first levy invoice will arrive after the end of your first year in business. After that, you’ll be invoiced once a year, usually in July or August.
