A common question when Kiwi tradies are setting up on their own is, ‘Should I register a company or be a sole-trader?’
Here are 3 things to consider.
1. Liability
A company has ‘Limited Liability’. This means that you put in some starting money (called 'capital'), but if trading goes badly and you end up with debts the company can’t pay for, you’ll lose your initial capital, but no more.
If you’re a sole trader and trading goes badly, you’ll be personally liable for all those trading debts to the point you are personally bankrupted.
Obviously you’ll be trying to avoid the business failing, but when you start employing staff, taking on bigger contracts and dealing with more risk, you’re likely to sleep better at night knowing your personal assets are separated from the company’s assets.
2. Costs and Admin
There are some setup costs to registering a company, around $140 for the filing fee and then an annual fee of around $50. When it comes to tax though, the major extra cost is having to file an extra tax return for the company, as well as an individual tax return for yourself.
A sole trader will still have an accounting cost to prepare financial statements and a tax return, but with just one tax return to file it’ll be less.
3. Growth plans
If you’re not wanting to employ anyone and are happy running a ‘one-man band’ type business, then the cost savings and simplicity of being a sole trader might work fine.
But if you’re looking to grow the business, you may need extra capital. Let’s say you need an extra $100,000 in capital so the business can buy a digger to be able to bid on some bigger jobs. You might decide to sell a portion of your shares to a family member or investor in exchange for that cash. This type of capital raising becomes much easier with a company structure.
These are starter points and there might be other factors that apply to you. Talking it through with your accountant is always a good next step.