Choosing the right Business Structure

Thinking about starting your own business in New Zealand?

Congratulations! As you embark on this exciting journey, one of the key decisions you’ll need to make is choosing the right business structure.

This decision will impact your taxes, legal liability, the longevity of your business, and even your ability to secure funding. Let’s dive into the main options and their features to help you make an informed on what business structure you go with.

Before we start

Keep in mind that no matter which business structure you choose, you:

can hire staff
must pay tax to Inland Revenue
must be registered for GST if turnover is expected to exceed $60,000 in any 12-month period.

Find out more about GST: GST for New Zealand Businesses: A Comprehensive Guide

Find out more about employment responsibilities: Quick guide to employment basics

Should I operate as a Sole Trader?

Operating as a sole trader means you’re running the show solo. It’s the lowest cost of entry. This is because, firstly there are no legal costs. Secondly, it requires no registration of a name. Here’s what you need to know:

Tax Implications: Your business income is treated as your personal income for tax purposes. The net income is therefore taxed at your marginal tax rate.
Spousal Involvement: You can pay your spouse a salary. However, advance approval from Inland Revenue is required.
Unlimited personal liability: You’re personally responsible for any business debts or losses, putting your personal assets at risk should the business fail.
Business Lifespan: The business ceases upon your death unless otherwise specified in a will.

Should I operate as a Partnership?

Partnering up with one or more other individuals? A partnership may be suitable. Again, there are relatively low costs of entry. Here’s what to expect:

Taxation: A partnership tax return is required. Income is split among partners. The split doesn’t not have to be 50/50 – it can be based on what is agreed. The individual partners pay taxes on their share of the profits individually.
Agreements: It’s best practice to define terms of the partnership in a partnership agreement. Otherwise, as a default the Partnership Act applies.
Liability: Partners are personally liable for all business debts which can put your personal assets at risk should the business fail.

Should I operate through a Company?

Incorporating your business as limited liability company? There are higher costs of compliance but generally more legal protection and flexibility. Here’s what changes:

Legal Entity: The company is separate from its shareholders. Therefore, the shareholders cannot be held responsible for company liabilities. The exception to this is when shareholders have provided personal guarantees to lenders.
Taxation: Subject to a flat company tax rate of 28%.
Director Responsibilities: Directors have legal duties and obligations in accordance with the Companies Act. Therefore, there are various other compliance costs that your accountant can advise on and complete for you as Director.
Liability: The Directors’ generally have personal liability is limited. The only exceptions to this is a director can be liable if the company trades while insolvent or they are held responsible under Health & Safety Laws.
Agreements: Where there are multiple shareholders, it is best practice to have in place a shareholder’s agreement. Amongst other things, this agreement can cover each working shareholders responsibilities, remuneration, divided policies and how the exit of any shareholders is handled. A lawyer will help you through this process in conjunction with your accountant.

Can I run a business through a Family Trust?

Yes, but it is not very common. This is because trading trust are significantly more expensive to set-up than other entities and have a very high administration component under recent changes to Trust laws. Here’s what you should know:

Structure: Involves a settlor, beneficiaries, trustees, and a trust deed.
Flexibility: Trusts offer flexibility in income and asset distribution.
Taxation: Subject to a flat tax rate of 39%. Taxable distributions can be made to beneficiaries. These distributions are taxed at the individual beneficiary’s tax rate.
Liability: Trustees may be held liable for trust debts.

Our Recommendation:

Choosing the right business structure is crucial for your success. We recommend seeking legal and accounting advice specific to your situation in order to understand the initial and ongoing costs of each option. Additionally, be aware of industry regulations that may limit certain ownership structures. With the right structure in place, you’ll be well-positioned for growth and prosperity in your business endeavors.

Ready to take the next step? Get in touch with us to explore your options and set your business up for success. Let’s make your entrepreneurial dreams a reality!

Remember, the right structure sets the stage for your business journey. Choose wisely and thrive!