So do you want to start your own business in 2023? Well done. Today you start as a sole trader and operate your business independently with no other people.
Sole traders are often referred to as « self-employed » because they run their own businesses rather than being employees of a larger organization. They are responsible for everything that happens within your business, including paying taxes and keeping records.
There are other entities that you can use for your business; however, in this business blog article, we will explain the ins and outs of being a sole trader, including:
- Sole Trader Explained
- legal stuff
- Be paid
- tax requirements
- taking employees
- Other considerations
Pros and cons of being a sole trader
Let’s start by explaining sole trader status.
What is a sole trader?
TO sole trader is someone who owns and runs their own business. As a sole trader, you are in charge of all aspects of your business, from finding customers and getting work done to keeping track of your income and expenses and paying taxes on your profits.
Being a sole trader is different from owning a business in that there is no legal distinction between you and your business. This means that you are personally responsible for any debt or loss your business incurs. It also means that you get to keep all the profits after taxes, unlike a company, where the profits are shared among the shareholders.
Key elements to become a sole trader
Here are some key things to remember in order to become a sole trader.
You will need to register your business with the relevant authorities: in New Zealand, this is the Companies Office, and in Australia, it is the Australian Securities and Investments Commission (ASIC).
You will need a business bank account to separate your personal and business finances.
You must put your business name on all marketing materials, websites, and social media accounts. You can trade under your own name or use a business name as a sole trader. A business name is a business name that is different from your personal name. You will need to register a business name with the Companies Office or ASIC if you use a business name.
To employ people, you will need to comply with labor laws and pay your taxes and retirement.
How are individual traders paid?
Individual traders can choose how they want to be paid by salary or dividend. A stipend is an amount that you agree to pay yourself each month, just as you would pay an employee.
A dividend is a distribution of profits from your business that you can take as cash or reinvest in the business. The advantage of taking a bond is that you only pay tax on the money once, when you withdraw it from your trading account. The downside is that you may pay more tax overall, since dividends are taxed at your personal tax rate (which could be higher than the business tax rate).
What are the costs of becoming a sole trader?
The cost of becoming a sole trader varies depending on the country you are in and the type of business you want to start.
For example, there is no fee to register as a sole trader in New Zealand; You can do it online through the Business Office website. While in Australia, there is a $50 fee to register as a sole trader with ASICs. You’ll also need to pay an annual registration fee, currently $87 for companies with annual turnover of less than $10 million.
Suppose your turnover is more than $10 million. In that case, you’ll have to pay a higher annual fee: currently $360 for companies with a turnover of between $10 million and $100 million and $1800 for companies with a turnover of more than $100 million.
What can self-employed traders claim taxes on?
As a sole trader, you can claim tax deductions for any expenses incurred ‘wholly and solely’ during the operation of your business. This includes cost of goods sold, office, travel, and marketing expenses.
You can also claim deductions for using your home as an office, for example, if you have a home office or dedicated workspace or use part of your home to store supplies or equipment. You will need to keep records of your expenses and how they relate to your business in order to claim these deductions.
Can sole proprietors hire employees?
Yes, as a sole trader you can employ people. You must comply with the employment law and pay your taxes and retirement.
You can pay your employees by wages or salary or hire them to perform specific tasks or projects. If you pay an employee for wages or compensation, you must withhold taxes from their wages and turn it over to the government on their behalf.
You will also need to make mandatory retirement contributions for your employees, currently 9.5% of their gross wages or salary. These contributions go into a retirement fund, a savings account that provides income to employees when they retire.
What are the pros and cons of being a sole trader?
One of the main advantages of being a sole trader is that you have complete control over your business: you don’t have to answer to anyone else and you can make all the decisions about how your business is run.
Another advantage is that it is relatively easy and inexpensive to establish yourself as a sole trader; in most cases, you can do it online in just a few minutes.
The main disadvantage of being a sole trader is that you are personally responsible for all debts and losses incurred by your business. If your business is sued or is unable to pay its debts, your personal assets, such as your home or savings, could be at risk.
Another drawback is that raising money as a sole trader can be more challenging than for a business. This is because potential investors are more likely to invest in a business structured as a company, since they are not personally liable for the business’s debts.
Should you start your business as a sole trader?
Whether you start your business as a sole trader or as a company depends on many factors, including the size and nature of your business, how much money you need to raise, and whether you are comfortable with the level of personal responsibility involved.
Choosing between a sole trader and a company can be tricky; however, you can access information on legal entity structures by country online. For example, for US residents, there is the SBA.gov website, which has a comprehensive report on business structures and other topics such as calculating the costs to start your business.
If you’re starting a small business and don’t need to raise a lot of money, being a sole trader might be your best option. This is because it is relatively easy and inexpensive to set up as a sole trader, and you have full control over your business.
However, setting up as a business may be a better option if you are starting a larger business or need to raise capital from investors. This is because companies can offer limited liability to shareholders, which means they are not personally liable for the company’s debts.
Regardless of the structure you choose for your business, make sure you understand the pros and cons of each option before making a decision. And if you’re ever unsure which structure is right for you, seek professional advice from an accountant or business attorney.