Sole Trader vs Limited
If you are thinking about starting a business or going out on your own, one of the first questions you need to consider is how you will structure your affairs.
This is important as each carries a different set of legal and financial obligations which can affect how your company evolves and grows.
So what is the difference?
A sole trader is essentially a person operating as themselves and is the sole owner of their business.
All they have to do is declare their earnings to the IRD.
Additionally if they earn over $60,000 there is a requirement to be GST registered. Some would argue that once this threshold is met that it’s possibly time to consider moving to a Limited Liability set up.
The good thing being, if you start out as a sole trader it’s possible to transition to a limited liability company arrangement.
In contrast, a limited liability company is a type of business structure that has its own legal identity, separate from its owners and managers. This remains the case even if it’s run by just one person, acting as shareholder and director.
So what are the advantages and disadvantages to the two arrangements?
Sole trader advantages
It’s very easy to set up and can be done with little cost and effort.
It affords greater privacy as there is no listing on company registration websites.
Sole trader disadvantages
A sole trader has unlimited liability vs limited liability which means if you incur any debt in the course of business and can’t pay it, you stand the chance of having personal assets seized.
Raising finance can be tricky as financiers prefer lending money under a limited liability setup, so securing money to expand or grow your business could prove tricky.
Limited liability advantages
Unlike a sole trader a limited liability trading company has limited liability (hence the name). This means you can separate your personal assets and business assets so you only stand to lose what you put into your business with it being a separate entity i.e Joe Blogs Ltd is distinct from Joe Blogs the individual.
In general Limited liability companies are more efficient than sole traders as they have favourable tax rates.
Once you have registered a company you have the exclusive right to the name by comparison, as a sole trader someone could also conduct business using the same name.
Limited liability disadvantages
Being set up as limited liability comes with additional costs as it requires a set up fee.
More importantly you need to be aware of your legal obligations as a director and the potential consequences of breaking these. So it’s advisable to seek legal advice on these requirements which will also incur costs.
Your ability to make speedy business decisions may be hindered as you will need to follow obligations defined by director duties.
Ultimately if you are looking to go into business or change your current model you need to think seriously about what suits you best. As with anything it’s worth talking to an account or business advisor to discuss what is best for you.
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