What is a Sole Trader

What is a Sole Trader
The simplest form of business structure is that of a sole trader. This is where you trade on your own account as a self-employed person. A sole trader usually has no formal or legal processes to set up the business. The owner/manager is personally entitled to all profits, but is also personally liable for all business taxes and debts.

No licenses or no legal involvement is required, except with the IRD for taxation and GST.

The income of the business is taken as income belonging to the proprietor and the proprietor pays the tax. It is generally easy to start this type of entity, but there is no protection from creditors of business debts should things go wrong in the business.

The main advantage is that you have full control and there is little cost involved in setting up and starting.

The downside is that you are personally responsible for all the debts of your business and your personal assets can be in jeopardy if things go wrong with the business. This is because creditors will bring a lawsuit against you personally. They will try and recover any losses suffered or money owed, by taking your personal assets.

A sole trader means that you are not distinct from the business itself, unlike a company where the company is a person in the eyes of the law, and the shareholders in the company are separate people in the eyes of the law. Before choosing this structure, you need to consider your personal responsibility for all the liabilities of the business, without any limitations.

This is a significant disadvantage that needs to be considered.

Advantages and Disadvantages
The advantages and disadvantages of sole traders are:

  1. Advantages
    1. Full control over the business.
    2. Easy to set up.
    3. Easy to close.
    4. Owner is personally entitled to all the profits.

  2. Disadvantages
    1. Personal assets are at risk.
    2. Difficulty in taking time off.
    3. May be problems with who takes over the business when you are ready to retire, if you are ill or are deceased.