One of the most important decisions you’ll make for your business will be its structure. Your decision here will affect your level of control and responsibility over your business. You can change the structure later on, but this can be costly and complex. It pays to get it right first time.
What are my options?
We have three main business structures in NZ:
Sole Trader
As the name suggests, sole trader is based around one person. As the sole trader you reap all the profits and make all the business decisions.
You’ll also have the advantage of lower compliance costs. Your business and you are considered to be the same legal entity, so another one is not needed. Your business taxes will be filed under your personal IRD number.
The downside of this structure is you’ll also be personally responsible for all the business debts. Consider the type of industry you’re in and the likelihood of default. Riskier industries (i.e. construction) tend to avoid this structure because of the personal liability for the owner. Be comfortable with this if you want to be a sole trader.
- Sole Trader
- Partnership
- Company
Sole Trader
As the name suggests, sole trader is based around one person. As the sole trader you reap all the profits and make all the business decisions.
You’ll also have the advantage of lower compliance costs. Your business and you are considered to be the same legal entity, so another one is not needed. Your business taxes will be filed under your personal IRD number.
The downside of this structure is you’ll also be personally responsible for all the business debts. Consider the type of industry you’re in and the likelihood of default. Riskier industries (i.e. construction) tend to avoid this structure because of the personal liability for the owner. Be comfortable with this if you want to be a sole trader.
Partnership
Partnerships are suitable for two or more people. You’ll find a partnership ideal if you want to pool your resources and share profits.
Partnerships divide the profits equally amongst owners if there is no deed to the partnership. For added security, you should think about having a deed drawn up and agreeing duties, responsibilities and profit share before becoming a partnership.
Partners in most instances are also personally liable for the debts of the partnership. You should consider the industry you’re in as well as the reliability of your partner before proceeding.
You’ll need a separate IRD number for the partnership. You’ll pay tax on any share of profits you receive in your personal tax return.
Partnerships are suitable for two or more people. You’ll find a partnership ideal if you want to pool your resources and share profits.
Partnerships divide the profits equally amongst owners if there is no deed to the partnership. For added security, you should think about having a deed drawn up and agreeing duties, responsibilities and profit share before becoming a partnership.
Partners in most instances are also personally liable for the debts of the partnership. You should consider the industry you’re in as well as the reliability of your partner before proceeding.
You’ll need a separate IRD number for the partnership. You’ll pay tax on any share of profits you receive in your personal tax return.
Company
A company is suitable for any number of people. Most organisations with many owners (shareholders) will setup as a company.
A company is a separate legal entity to the shareholders. Companies have one major advantage: the liability of the shareholder is limited to the money put into the business. In other words, under normal circumstances, shareholders cannot be held personally liable for debts incurred by the company.
Shareholders need to pay a one-off fee at the Companies office to register. The company will also need to file an annual company return, which incurs a small fee.
You’ll also need to consider the amount of tax to be paid. Companies are taxed at a flat rate of 28 cents for every dollar of profit they make. A sole trader's effective personal tax rate depends on how much you earn. You can compare the difference between the two here (using your estimated profit).
A company is suitable for any number of people. Most organisations with many owners (shareholders) will setup as a company.
A company is a separate legal entity to the shareholders. Companies have one major advantage: the liability of the shareholder is limited to the money put into the business. In other words, under normal circumstances, shareholders cannot be held personally liable for debts incurred by the company.
Shareholders need to pay a one-off fee at the Companies office to register. The company will also need to file an annual company return, which incurs a small fee.
You’ll also need to consider the amount of tax to be paid. Companies are taxed at a flat rate of 28 cents for every dollar of profit they make. A sole trader's effective personal tax rate depends on how much you earn. You can compare the difference between the two here (using your estimated profit).
Quick Summary
You should now have an idea of the type of organisation you want your business to be. For more information refer to the business.govt.nz page here.
We can also help you to weigh up the pros and cons of your business structure – get in touch today.
You should now have an idea of the type of organisation you want your business to be. For more information refer to the business.govt.nz page here.
We can also help you to weigh up the pros and cons of your business structure – get in touch today.
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