Did you know there are a several different ways you can structure your business in New Zealand? Each option has its own strengths and weaknesses as well as common pitfalls to avoid.
There are four main types of business structures in New Zealand;
- Sole traders
When you are a sole trader your business is built around you. You’re 100% responsible for liabilities and debts, but you also retain full control of the business and its profits.
Many small business owners start out as sole traders as they can establish their business without legal costs, unlike companies. This is because sole traders and their businesses are considered to be the same legal entity. You even pay tax through your personal IRD number.
Example: Individual tradesperson, such as a self-employed gib stopper or a painter and decorator.
A partnership is when two or more people or entities join together to pool their assets and share the profits and liabilities in a business. They often bring different skills to the table and varying resources, with the division of profits and liabilities – in addition to individual roles and responsibilities – outlined in a partnership agreement.
You are still taxed as an individual on your income from the partnership. However, while you’re liable for your own debts, you can also be liable for business debts incurred by your partners if they become insolvent.
It is possible for some partners to achieve limited liability through the use of a limited partnership.
Example: A legal or accountancy practice.
Companies are separate legal entities to their shareholders. This provides shareholders with limited liability from any of the business’s debts beyond the value of their shares in the company (this is what Limited or Ltd stands for in a company name). However, if a shareholder is involved in the running of the business (as a director, for example), and is found to have traded recklessly, fraudulently or not in the company’s best interests, they can still be held liable. Most financial lenders will also only give a business loan in exchange for a personal guarantee overriding limited liability.
Shareholder income is taxed at a different rate to the company itself. All companies must declare their director and shareholder details by registering for incorporation with the Companies Office.
Companies are extremely common structures for operating businesses in New Zealand.
Another very popular entity in New Zealand is a trust. Trusts are particularly useful for asset protection and estate planning, and so are more commonly used for owning private and investment assets than for operating businesses.
With our in depth knowledge of business in New Zealand, we are well positioned to find the best structure to suit your needs and allows you to grow. We can help with:
- Identifying the right option for you and your requirements
- Set up of your preferred structure
- Registration with government agencies for tax
- Annual company maintenance
Credit: Information sourced from business.govt.nz