Sole Trader vs Company - Myth busting

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#2343367 25-Oct-2019 08:24

Back in the 90's I did some contracting work. Set myself up for GST and just kept track of income and expenses. The accountant I talked to recommended just being a sole trader for the type of work I was doing but did insist I get public liability insurance (I'd recommend that too, covers your ass in case of accidents).

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#2343368 25-Oct-2019 08:35

I was going to strongly suggest the OP get professional advice until I actually looked at Hnry..... wow what a great service!

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BlinkyBill

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#2343372 25-Oct-2019 08:58

marpada:

Having a company allows some "creative" ways of avoiding tax.

no it doesn’t; there are allowable ways of avoiding tax, and not-allowed ways. The only was to “creatively” avoid tax would be to hire a specialist tax lawyer, transfer funds across multiple international companies, and take advantage of tax havens offshore.

not really worthwhile for a single-person income stream.

for context, my company of 100 employee’s, services business, pays 28% tax on business income and 33% tax on personal income, including my own as the owner of the business. There are no ways of reducing my tax and buying a flash boat with that money. And if I bought a flash boat for my business and used it for personal use I would probably be paying Fringe Benefits Tax on that usage.

sen8or

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#2343417 25-Oct-2019 10:46

You can dance around the fringes of tax planning a little bit

- income spreading if multiple family members are actively involved in the business you "can" apportion profit (wages) to them to take advantage of lower personal tax rates, but, it can't just be a payment for the purposes of minimising tax, it has to be based on work provided to the business (so, don't think you can list your kids as employees and pay them all $48k per year to reduce your tax). If your partner or family work legitimately in the business then this may be available, but if they don't, then this option is not available. You can also have multiple shareholders who legitimately own shares in the company and are entitled to dividends (so your family could own a portion each) but as owners of the business they also have rights and obligations (like selling off their shares) which may cause unintended consequences.

- income deferral or bringing forward expenses, but only when it is justifiable to do so (e.g. project completion after balance date period, if it is normal to invoice at completion, this may be acceptable, but if you have a regular pattern of invoicing monthly, then not invoicing for work done is less likely to be acceptable).

Most NZ tax is done on a self assessment basis. The onus is on the tax payer to submit what they believe (or have records to prove) is their taxable income and expenses, this applies for income tax, GST, FBT, company tax.

The IRD may not specifically ask for records of each tax payers self assessment to confirm the bona-fides of the claim, this can leave things open to abuse by those who look to evade tax. I don't know the specific details, but I'm pretty certain the IRD has many tools at its disposal that would quickly highlight disparities between what is being declared and what is "normal". They wield a pretty decent stick when it comes to tax evasion with civil and criminal penalties at their disposal.

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#2343418 25-Oct-2019 10:49

BlinkyBill:

Batman:

there are many advantages as a company

1. limited liability. if you get sued as a sole trader your entire life is bankrupted. if you get sued as a company your personal stuff is not touched unless you are sued personally for some criminal negligence or something.

2. company has a lower tax rate and your accountant can use that to your advantage. i still don't understand how it works but they will sort it out at the end of the year. if you make less your savings are less, if you make more your savings are more. so this may or may not be an advantage after applying all the accounting fees but in general you will be better off. a good accountant will find ways to save you money that you didn't know existed.

3. if you end up needing to register GST, a company can do that easy. if you personally need to register for GST all your personal asset may be liable for gst when you sell them (eg your house, car, etc)

4. it goes on and on.

just set up a company already.

my accountant made sure I was using the cheapest things and told me off using xero, said it's "very sexy" but i didn't need it

why post, if you don’t know what you are talking about?

1. It is expensive to sue. A sole trader is typically a single person income for services, not product, and doesn’t have assets; so unlikely to be worth the price of a lawsuit.

2. Lower for the company, yes; but as soon as you draw the money for yourself, you are back onto individual tax rates. So if you are a single person, and want to use the entirety of your revenue for yourself (instead of investing in growth, R&D etc) then value of a company is nothing.

3. Setting up for GST is the exact same process for a company or a sole trader. Only business assets and expenses are gst claimable and only business revenue attracts gst. don’t think you know how gst works.

4. No it doesn’t. There is no benefit to using a company unless you intend to employ people, or you have business assets of value. If you are a services-type of business with only yourself as a revenue stream, sole trader is the way to go.

i would change accountants if I were you.

I suspect the truth is somewhere in the middle, with a big "it depends".

dfnt

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#2343422 25-Oct-2019 10:58

BlinkyBill:

2. Lower for the company, yes; but as soon as you draw the money for yourself, you are back onto individual tax rates. So if you are a single person, and want to use the entirety of your revenue for yourself (instead of investing in growth, R&D etc) then value of a company is nothing.

4. No it doesn’t. There is no benefit to using a company unless you intend to employ people, or you have business assets of value. If you are a services-type of business with only yourself as a revenue stream, sole trader is the way to go.

Agreed.

As a contractor you pretty much fall into both these points, making a company pointless. Whatever loopholes used to exist which made forming a company appealing, IRD pretty much closed them all

If I ever go contracting again I'll just be doing a sole trader, won't be wasting time setting up a company again.

kotuku4

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#2343424 25-Oct-2019 11:02

I would like to ask a slightly different related question.

As a salaried employee, i have technical association fees and work related expenses that are not reimbursed by my employer. Eg cell phone and monthly account used as much for work as personal. Some equipment. Possibly could buy more equipment/software to make my life easier and possible side jobs for additional income.

Is it possible to set up something and claim tax back on expenses, depreciation on equipment, home office, storage?

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#2343427 25-Oct-2019 11:06

negan: Thanks everyone! I’m still wary of accountant advice as most people I’ve spoken to who contract have said the xtra work involved isn’t worth it. Time better spent either working on myself or doing things I love to do. Tax ain’t one of them!
So in a summary I’m gonna go with Hnry as it’s a no brainer to me.
My life isn’t to become a tax expert, that is not a life goal!

It has been a long while since I've seen a shill post / advertorial but this has been a top class effort.

BlinkyBill

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#2343430 25-Oct-2019 11:08

kotuku4:

I would like to ask a slightly different related question.

As a salaried employee, i have technical association fees and work related expenses that are not reimbursed by my employer. Eg cell phone and monthly account used as much for work as personal. Some equipment. Possibly could buy more equipment/software to make my life easier and possible side jobs for additional income.

Is it possible to set up something and claim tax back on expenses, depreciation on equipment, home office, storage?

short answer - no. Business expenses need to be related to business income, I.e. generating business income.

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#2343432 25-Oct-2019 11:11

Batman:

BlinkyBill:

Batman:

1. limited liability. if you get sued as a sole trader your entire life is bankrupted. if you get sued as a company your personal stuff is not touched unless you are sued personally for some criminal negligence or something.

1. It is expensive to sue. A sole trader is typically a single person income for services, not product, and doesn’t have assets; so unlikely to be worth the price of a lawsuit.

I suspect the truth is somewhere in the middle, with a big "it depends".

I agree with the 'it depends'.

If you make an error and brass someone off significantly, cause wasted time and/or a small financial loss, you'll be shown the door and but that is likely all.

If you make an error that has unexpectedly large repercussions and an insurance company becomes involved, all bets are off, and having a layer between your personal assets and an insurance company would be worthwhile. For example, someone recently made an error on the roof of a building under construction...

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BlinkyBill

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#2343433 25-Oct-2019 11:12

Batman:

BlinkyBill:

Batman:

there are many advantages as a company

1. limited liability. if you get sued as a sole trader your entire life is bankrupted. if you get sued as a company your personal stuff is not touched unless you are sued personally for some criminal negligence or something.

2. company has a lower tax rate and your accountant can use that to your advantage. i still don't understand how it works but they will sort it out at the end of the year. if you make less your savings are less, if you make more your savings are more. so this may or may not be an advantage after applying all the accounting fees but in general you will be better off. a good accountant will find ways to save you money that you didn't know existed.

3. if you end up needing to register GST, a company can do that easy. if you personally need to register for GST all your personal asset may be liable for gst when you sell them (eg your house, car, etc)

4. it goes on and on.

just set up a company already.

my accountant made sure I was using the cheapest things and told me off using xero, said it's "very sexy" but i didn't need it

why post, if you don’t know what you are talking about?

1. It is expensive to sue. A sole trader is typically a single person income for services, not product, and doesn’t have assets; so unlikely to be worth the price of a lawsuit.

2. Lower for the company, yes; but as soon as you draw the money for yourself, you are back onto individual tax rates. So if you are a single person, and want to use the entirety of your revenue for yourself (instead of investing in growth, R&D etc) then value of a company is nothing.

3. Setting up for GST is the exact same process for a company or a sole trader. Only business assets and expenses are gst claimable and only business revenue attracts gst. don’t think you know how gst works.

4. No it doesn’t. There is no benefit to using a company unless you intend to employ people, or you have business assets of value. If you are a services-type of business with only yourself as a revenue stream, sole trader is the way to go.

i would change accountants if I were you.

I suspect the truth is somewhere in the middle, with a big "it depends".

no it isn’t. The tax situation for sole traders vs company is extremely clear and pretty simple. If you are a single-person income stream with no significant business assets which are depreciable, then sole trader is the way to go. In this scenario, setting up a company is just additional cost and complexity.

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#2343437 25-Oct-2019 11:22

BlinkyBill:

Batman:

BlinkyBill:

Batman:

there are many advantages as a company

1. limited liability. if you get sued as a sole trader your entire life is bankrupted. if you get sued as a company your personal stuff is not touched unless you are sued personally for some criminal negligence or something.

2. company has a lower tax rate and your accountant can use that to your advantage. i still don't understand how it works but they will sort it out at the end of the year. if you make less your savings are less, if you make more your savings are more. so this may or may not be an advantage after applying all the accounting fees but in general you will be better off. a good accountant will find ways to save you money that you didn't know existed.

3. if you end up needing to register GST, a company can do that easy. if you personally need to register for GST all your personal asset may be liable for gst when you sell them (eg your house, car, etc)

4. it goes on and on.

just set up a company already.

my accountant made sure I was using the cheapest things and told me off using xero, said it's "very sexy" but i didn't need it

why post, if you don’t know what you are talking about?

1. It is expensive to sue. A sole trader is typically a single person income for services, not product, and doesn’t have assets; so unlikely to be worth the price of a lawsuit.

2. Lower for the company, yes; but as soon as you draw the money for yourself, you are back onto individual tax rates. So if you are a single person, and want to use the entirety of your revenue for yourself (instead of investing in growth, R&D etc) then value of a company is nothing.

3. Setting up for GST is the exact same process for a company or a sole trader. Only business assets and expenses are gst claimable and only business revenue attracts gst. don’t think you know how gst works.

4. No it doesn’t. There is no benefit to using a company unless you intend to employ people, or you have business assets of value. If you are a services-type of business with only yourself as a revenue stream, sole trader is the way to go.

i would change accountants if I were you.

I suspect the truth is somewhere in the middle, with a big "it depends".

no it isn’t. The tax situation for sole traders vs company is extremely clear and pretty simple. If you are a single-person income stream with no significant business assets which are depreciable, then sole trader is the way to go. In this scenario, setting up a company is just additional cost and complexity.

just wondering - are you an accountant by any chance?

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#2343453 25-Oct-2019 11:23

Make the wife who's on lower tax rate a shareholder and pay dividend to her at her lower tax rate which she deposits into the shared family cheque account...

BlinkyBill

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#2343456 25-Oct-2019 11:48

Batman:

just wondering - are you an accountant by any chance?

no, but I am a Company Director (of my own company) and I employ an accountant, and a lawyer (not a specialist tax lawyer).

sen8or

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#2343459 25-Oct-2019 12:01

BlinkyBill:

Batman:

just wondering - are you an accountant by any chance?

no, but I am a Company Director (of my own company) and I employ an accountant, and a lawyer (not a specialist tax lawyer).

I am, and whilst blinkybills answers are somewhat simplified, they are not wrong.

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