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Choosing the right business structure

You can choose one of the three most common structures for you or your business — sole trader, partnership or company. Here’s how to decide which is right for you.

This is an important decision that can affect your tax, liabilities, growth and investment opportunities whether you’re self-employed or a business. Structure is important not just for how you work now but also the way you want to work in the future. Take advice from a lawyer or accountant before you make a decision.

Becoming a sole trader — someone who starts trading on their own — is the simplest way to start a business. It’s a common choice for self-employed people.

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Advantages

  • Costs are low.
  • It’s easy to run.
  • You retain control of your work and profits. 

Disadvantages

  • You’re responsible for all taxes and debts.
  • It’s harder to get loans and investment.
  • It’s harder to sell your business.

Tips on choosing the right funding

Staff

Being a sole trader doesn’t stop you from employing people. All you need to do is register as an employer with Inland Revenue (external link)  first.

How to start

There are no legal processes or registrations to go through. All you need is:

  • a personal IRD number — for paying income taxGST and PAYE
  • licences and permits applicable to the business
  • qualifications or registrations for your trade or profession.

You should also tell Inland Revenue when you start out as a sole trader.

What sole traders are accountable for

Unlike a company, a sole trader’s business isn’t a separate legal entity from its owner. You’re responsible for all work-related debts and liabilities. Your personal assets, such as the family home, could be at risk if you have work debts you can’t repay or an unsatisfied customer sues you.

GST

If your turnover — what you earned — was more than $60,000 in the last 12 months, or you expect your turnover to be more than $60,000 in the next 12 months, you must register for GST.

Income tax

Your net profit — what you earn after working expenses — is taxed at individual tax rates. While you’re working as a sole trader, you must file an IR3 income tax return at the end of each tax year. You may have to pay provisional tax in your second year.

Keeping records

You must keep accurate and complete work records for at least seven years. They should include banking information, proof of income, including cash income, expenses and cashbooks. It’s important you keep a record of money taken from any work accounts for your living expenses.
Keeping a dedicated bank account can help you keep work expenses separate from personal ones. It may also be helpful to use accounting software to accurately track income and expenses.

Your first year in business (external link)  - Inland Revenue

Sole traders (external link)  - Inland Revenue

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In a partnership, two or more people run a business together and agree to share assets, liabilities and skills. They’re most common among professional people, eg lawyers and accountants, and in farming.

Advantages

  • Easy to start.
  • Shared business operation costs, eg when several professionals operate out of a shared office.
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Disadvantages

  • Partners can be liable for debts incurred by other partners.
  • It can put individuals’ personal assets at risk.
  • Complications may arise if one of you wants to leave the partnership, or dies.

How to start

  • There’s no need to formally register a new partnership. Many partnerships are established with a formal partnership agreement.
  • Shares in a partnership are usually equal unless the partnership agreement states otherwise.
  • A partnership must have its own IRD number. Partners include their share of profits/losses in their individual tax returns.

What partnerships are accountable for

A partnership is an unlimited liability business agreement between entities (the partners), rather than a business that’s a separate legal entity.

All profits and losses, responsibilities and liabilities are shared according to the partnership agreement.

Tax

A partnership must have its own IRD number, but partners pay their share of tax on profits under their own IRD numbers.

Each partner can draw funds from business profits as they need them for personal use, just like a sole trader. The partnership agreement might put restrictions on this.

All income, expenses, tax credits, rebates, gains and losses are accredited to each partner in proportion to their share of the business, as set out in the partnership agreement.

Partners can take a salary and have PAYE deducted from their pay like an employee — the partnership agreement will set this out.

A partnership can have sleeping partners who invest in the business, but don’t have a say in its day-to-day running.

A partnership can have sleeping partners who invest in the business, but don’t have a say in its day-to-day running.

A company is a separate legal entity from its shareholders. Shareholders own the business — they’re people with a financial interest in it.

In some companies, one person or group, eg a family, may own all shares. Other companies list shares on the stock exchange, where the public and other companies can buy them.

Every company has a board of directors, even if there is only one director.

How to start

To start a company, you must register it with the Companies Office. This can be done online. You’ll first need to get a login for the Companies Office website. Use your RealMe login to access the site.

This lets you complete registration by:

  • checking the company name you want is available
  • reserving the name you want
  • registering the company.

Registering for online services (external link)  — Companies Office

What companies are accountable for

A company’s legal status limits the liability its shareholders have in the business to the value of their shares.

This is known as a limited company — you’ll see the shortened form “Ltd” at the end of company names, eg Sweet As Candy Ltd. 

ONECheck

Check if your company name and a matching domain name are available using ONECheck (external link) .

Step-by-step guide to starting a company (external link)  — Companies Office

Tax

  • Company profits are distributed to shareholders, who are taxed individually on their overall personal income.
  • Profits the shareholders do not take are the company’s, and get taxed at the company tax rate of 28%.
  • Companies don’t pay tax on earned revenue if they make a net loss.

Company tax (external link)  — Inland Revenue

casestudy making contact

How to file your Companies Office annual return

Every company in New Zealand must file an annual return with the Companies Office each year to confirm it’s still operating as a company. If you don’t file your annual return each year, your company risks being removed from the national Companies Register.

Companies Register — Companies Office

An annual return is not a tax return. It includes:

  • the company’s address(es)
  • names and addresses of its directors and shareholders
  • details of its ultimate holding company, if applicable
  • general filing information, eg the month the company files its annual return every year.

Annual returns (external link) — Companies Office

There’s a $45 fee to file an annual return. You can file online on the Companies Office website. If you haven’t done this before, you’ll need a RealMe® login to register for a Companies Office account.

File your annual return online (external link) — Companies Office

RealMe (external link) — Department of Internal Affairs

*RealMe® is a registered trademark of the New Zealand government and New Zealand Post.

You can run a business as a trading trust. The trustees are given the power to carry on the business.

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

Trading trusts (external link)  — Inland Revenue

Is your name available?

Check if anyone else has registered your intended business name, domain name and trade mark in one search using our ONECheck tool.

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