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Business structure overview

There are different ways to structure your business — whether you’re contracting, self-employed, in partnership or run a company or trust. Here’s where you’ll find information about each option, including the pros and cons, to help you decide which structure best suits you or your business.

While there are no great barriers in New Zealand to becoming a sole trader, starting a partnership or a company, it still pays to think about why you’re doing it and which choice will best suit you.

Ask yourself:

  • Do I want to get up and running quickly?
  • What work-life balance do I want?
  • Will I look for investors? 
  • Is this a business I will work to grow? 
  • Will this be a business I want to sell one day?

Talk to people who have chosen the structure you’re thinking about and think about getting an advisor, eg a lawyer or accountant who specialises in advising people in the industry you want to work in.

This website has more tips and information about the most common structures to help you make the best choice.

Sole traders are people who start in business or contracting on their own, without registering as a company. Many small business owners, contractors and self-employed people begin as sole traders. It’s the cheapest and easiest option, and may appeal to you if you want to make a living by following your passion, or to work as a contractor.

Pros and cons

Upsides include:

  • It’s easy to set up — you can get up and running quickly
  • Start-up costs are low — there are no legal or registration fees
  • You control the business and get all the profits
  • You can offset losses against other income.

Downsides include:

  • You’re liable for all debts — this may put your personal assets at risk
  • It’s harder to grow a sole trader business
  • Getting loans or investment can be more challenging
  • It’s harder to sell as a working business.

If you find you want to change your business structure, eg because it’s hard to attract investment as a sole trader, you can register your business as a company.

Staff

You can hire staff to help run the business. If you do hire staff you’ll need to register with Inland Revenue as an employer and meet a number of obligations.

Employer responsibilities (external link) — Inland Revenue

Tax

As a sole trader, you pay tax on all the income you earn from your work. You can claim work expenses to reduce your income tax.

You’re responsible for all your business debts, including tax and ACC levies, but you also keep control of the business and its profits. At the end of each financial year you must complete a tax return and submit it to Inland Revenue.

A company, in a legal sense, is separate from the people who own it — its directors and shareholders.

Shareholders are responsible for paying a company’s debts — up to the value of the shares they own in that company. They’re also entitled to a dividend which is a share in the company’s profits.

Doing business as a company can be more complicated than other business structures, eg:

  • you must file annual returns with both the Companies Office and Inland Revenue 
  • different rules apply to how a company and its shareholders pay tax
  • details of a company’s directors and shareholders must be provided to the Companies Office.

To help when starting a company, it’s a good idea to get as much advice as you can. Talk to people you know who’ve started companies or who advise business owners, eg accountants and business mentors.

If you think this may be right for you, our website has more information about registering your company and what to do next.

Pros and cons

Upsides include:

  • Shareholders’ liability is limited to the amount they paid for their shares
  • Your tax rate is lower than top personal rates
  • You have more credibility in the market
  • It’s easier to sell a business because it’s a separate entity
  • The business can grow indefinitely — it’s not tied to one person
  • It’s easier to get funding and investment.

Downsides include:

  • There’s more regulation than for sole traders and partnerships
  • Companies can need more investment to grow
  • Directors need to understand their responsibilities.

Staff

If you hire staff to help run the company then you need to register as an employer with Inland Revenue and meet a number of obligations.

Tax

A company pays tax on its profits — the income left over after taking away expenses. If the company distributes profit to its shareholders, shareholders will pay income tax on the dividend but may also get tax credits to help them meet that obligation.

If a company’s expenses are more than its income, it makes a loss and may not have to pay tax.

A partnership is when two or more people or organisations form a business. Partners set out in a partnership agreement how they’ll share profits, debts and work.

It’s a popular structure with professionals, eg architects, lawyers and accountants.

Pros and cons

Upsides include:

  • You can share the load of running a business
  • Costs are also shared
  • Partners can specialise and focus on strengths
  • Partners can bring in more capital investment
  • You have other people to talk to about the business
  • Partners can offset losses against other income. 

Downsides include:

  • Each partner is liable for all the partnership’s debts — putting personal assets at risk
  • You may be liable for your partners’ business debts too
  • If you find you want to change your business structure, eg because one or more partners wants to leave, you can dissolve the partnership.

Staff

You can hire staff to help run the business. If you hire staff the partnership needs to register as an employer with Inland Revenue and meet a number of obligations.

Employer responsibilities (external link) — Inland Revenue

Tax

A partnership doesn’t pay income tax as a business. It distributes all the income between the partners who then pay income tax on their share.

Each partner is responsible for their own debts. But you can also be responsible for your partners’ business debts, too. At the end of each financial year the partnership must complete a tax return and each partner needs to complete an individual tax return.  These are then submitted to Inland Revenue.

A trust is formed when someone puts something they own in the care of someone else, to be administered for the benefit of others. Trusts are commonly used to protect things you own — your assets — from having to be sold to pay your debts. If you set up a trust to protect an asset, eg the family home, that trust owns the asset and looks after it on behalf of people who benefit from the trust. People who look after the trust are called trustees.

You can set up a special type of trust to run your business — known as a trading trust — where your company acts as the trustee.

Operating a trading trust is very complicated. If you want to go down that track, you should talk to your lawyer and accountant first.

Income can either be taxed at the beneficiary marginal tax rate — if distributed to beneficiaries — or at 33 per cent if kept in the trust.

Pros and cons

Upsides include:

  • It can be a good way to protect your business assets
  • They can be suited to family-run businesses.

Downsides include:

  • Running trading trusts is complicated
  • Trustees must understand their responsibilities.

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