An accountant’s guide: Transitioning from a sole trader to a limited company

If you have big plans for your sole trading business, you may be thinking about how the structure of it might change in the coming years. For many sole traders, transitioning to a limited liability company is a logical next step.

Of course, it is a decision that should be made at the right time, and for the right reasons. We asked Jarrod Walton, a chartered accountant and director at Chapmans Chartered Accountants in West Auckland, to share the key things to consider when making the transition.

What is the difference between being a sole trader and a limited liability company?

As a limited liability company, all of a business’s assets, debts, profits and liabilities are listed under a registered company name.

“Anyone can be a sole trader,” says Walton. “All you have to do is declare your annual income to the Internal Revenue Department, and pay the required income tax on those earnings.”

When your income as a sole trader reaches NZ$60,000, you are also required to register for, collect and pay GST.

And, while this doesn’t require you to become a limited liability company, Walton says he believes reaching the GST threshold is often a good time to consider a switch.

What are the benefits of becoming a registered business?

“The first thing is that being a registered business legally provides additional protection from liabilities you could face as an individual,” says Walton.

Any risks when you’re a sole trader are in your name, he explains.

If you’re selling clothes or mowing lawns, these risks may be minimal. But if you’re offering services or providing products that expose you to any liability, it’s worth considering having that under a separate entity.

This is also particularly important if you have, or plan to have, employees.

Secondly, there are tax advantages.

“Being a limited liability company enables accountants to structure your business affairs to save on income tax, and other claimable expenses,” says Walton.

The third reason for moving on from your sole trader status is precisely that – status.

There is undoubtedly an element of professionalism that comes with doing business under a company name, rather than as an individual. Sometimes this perception is just what you need to amplify your offerings (and income)!

Walton also notes that, if you wish to introduce any additional shareholders, you’ll need to be trading as a limited liability company.

What are the downsides of becoming a registered business?

For someone who wants to run their sole trader business with a minimum of fuss, it may seem like becoming officially registered is more work than it is worth. There are added costs ($160 to register and $45 per annum), and you will need an accountant to take care of all the extra administration required each year to ensure everything is done correctly.

But, as Walton notes, any potential downsides are often mitigated with the added tax benefits of trading as a limited liability company.

So how do you become a limited company?

The best place to start is by talking to your accountant or contacting a trusted business advisor.

“Many accountancy firms offer obligation-free discussions on making this transition,” says Walton. “It’s what we do daily – we need to make sure you understand everything about your obligations before moving forward.”

The process itself isn’t too difficult (depending on your business structure) and the first step is to register your company with Companies Office – this is known as incorporating a company.

You’ll be able to check that the company name you want is available, reserve it and register it by paying a fee. You will then be given an NZBN (New Zealand Business Number) that you will use when dealing with the government, suppliers and customers. Every registered business also has to declare information about the company’s directors and shareholders – even if there is only one.

Following this initial stage, there are other processes to complete, including establishing a bank account for the company and transferring assets into the company’s name. It is best to do these tasks in consultation with your business accountant.

New Zealand is a country built on small enterprises. But Walton explains that knowing what it means to become a limited liability company is crucial for many New Zealand sole traders to ensure they are running their business efficiently and effectively.

“It’s important because people should have a structure and plan in place from the outset, as not doing it right can cause headaches down the track.”

The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.

Research reveals the realities of running a small business

Research: The realities of running a small business

Working for yourself, being your own boss, building a brand – that’s the dream imagined by small business owners everywhere. And while it undoubtedly has its benefits, the reality of running the show also has more than its fair share of challenges.

A recent study commissioned by Prospa has shone a spotlight on the daily battles faced by New Zealand’s small business owners – and the extent of the work they put into making the business a success.

While there’s certainly room for improvement when it comes to business management and work/life balance, it’s proven that small business owners certainly aren’t afraid to put in the hard yards to make their business a success.

Working 9 till 5… and beyond

The research, which was carried out for Prospa by YouGov Galaxy, found that nearly half (49%) of small business owners around the country are working between six to seven days a week on their business, with one in five (20%) working the full seven days.

But long hours aren’t the only challenge small business owners are facing, the research found that over three quarters (76%) of respondents are struggling with one or more areas of business management – namely finance and accounting (39%), IT/technology knowledge (31%) and digital marketing (30%).

Other common struggles were debt collection and managing overdue invoices (20%), sales techniques (20%) and people management (17%).

As a result, up to 43% of small business owners have found themselves putting in extra hours to learn new skills. While 38% of respondents say they’re missing out on opportunities to grow their business and one in five (20%) reported cash flow issues that brought them to the brink of going out of business.

Interestingly, millennials (90%) are more likely than baby boomers (69%) to say there are areas of business management that they struggle with, particularly finance and accounting (52% compared to 33%), and people management (35% compared to 8%).

The personal impact of running a small business

The study also reveals the emotional impact of such pressures, with 88% of small business owners reporting that they experience negative emotions, such as frustration (44%), stress (40%) and feeling overwhelmed or burnt out (38%).

What’s more, a massive 81% of respondents said they’ve had to make sacrifices in order to focus on their business, including cutting back on personal time (58%), hobbies (57%) and exercise (48%). Sadly, time spent with family wasn’t far behind (38%), as well as time spent with a significant other (33%).

Unsurprisingly, 30% even cut back on sleep to get back to the grindstone.

Small business wish list: Skills and investments

Still, small business owners know what’s needed to improve things, with key skills in digital marketing (31%), financial literacy (30%) and sales techniques (30%) listed as having the biggest impact on their ability to manage and grow their business.

And when it comes to investments, 25% of small business owners felt that a marketing campaign would have the biggest impact on helping them grow their business, while 17% said hiring staff and 13% said better, more professional equipment.

Finding the resources to fund equipment is something that Kurt Jacks and his wife Althea, owner/operators of The Rib House in the Auckland suburb of Pakuranga, know all about.

“We found that when you start a small business, it sucks a lot of money, more than we anticipated,” says Kurt. “We needed to do upgrades and renovations to the kitchen, and we also eventually want to upgrade the size of our restaurant, but we needed a bit of help.”

Read more about The Rib House’s small business story.

The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.