Why structure matters
Your business structure is an outline of how you:
- own or share ownership of your business
- distribute profits
- pay taxes
- share responsibilities among different roles within the business.
You have a few options for how to structure your business, and the best fit will depend on your circumstances. Most businesses in New Zealand are sole traders, companies, or partnerships.
The structure of your business also determines its legal status within New Zealand. For example, a company has a different legal status from a sole trader, which is different again from a partnership. These differences affect the rules, regulations and taxes that apply to your business.
Whichever structure you choose, your business:
- can hire staff (once you’re registered with Inland Revenue)
- can export goods overseas
- must pay tax.
Before you make a decision, consider the pros and cons of the different business structures. Try talking to someone who uses the structure you’re interested in or get expert business advice from an accountant or lawyer.
Becoming a sole trader
A sole trader business is owned and run by a single person. Many small businesses and contractors start out as sole traders.
Being a sole trader gives you the most flexibility. You’ll be your own boss — but also your own staff.
It’s the cheapest and easiest option, and may appeal to you if you want to make a living by following your passion, work as a contractor or control every aspect of the business yourself.
There are risks to being a sole trader. You’ll be personally responsible for all debts, and it can be harder to get investment for a sole trader business. It’s also harder to sell your business.
Keep in mind that if you start off as a sole trader, you’ll still have the option to set up a company later.
Starting a company
A company is legally separate from its owners, which limits their risk and liability. Companies generally have more credibility, so it’s easier for them to grow and attract investment. They’re also easier to sell.
A company may be owned by one person, or have multiple shareholders. Shareholders each own a portion of the company, represented in shares.
Shareholders are responsible for paying the company’s debts, up to the value of their shares. But they also get a dividend — a portion of the profits.
Companies tend to be more complex business structures. They have to follow extra rules and regulations, too. Make sure to get professional advice before starting a company of your own.
Forming a partnership
A partnership is when two or more people or organisations form a business together. Partners create a partnership agreement to set out how they’ll share profits, debts and work.
A partnership is a popular structure with professionals — like architects, lawyers and accountants. Partnerships are relatively easy to start and can be a good way to attract investment.
The downside is that partners are all liable for the partnership’s debts, which may put their personal assets at risk.
It’s crucial for any partnership to have a clear, comprehensive agreement at its heart. If you choose this structure, consider getting legal advice to minimise the stress and strain.
Other business structures
Sole traders, partnerships and registered companies are the most common business structures in New Zealand, but there are other options to consider.
A different business structure may be a better fit, depending on:
- what your business does
- how you want to run it
- where you get your resources
- the values behind your business.
Other business structures to explore include:
- trusts and charitable trusts
- incorporated societies
- limited partnerships
- industrial and provident societies
- friendly societies and building societies
- credit unions.
What's next
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