Business structure overview

The structure of your business can impact its growth and the ease with which you can sell it. Each structure entails unique legal and financial responsibilities.

In New Zealand, the majority of businesses fall under the categories of sole traders, companies, or partnerships.

Regardless of the business structure you choose, you:

• can hire staff
• must pay tax
• can export.

If you decide to employ personnel, you must register with Inland Revenue as an employer and comply with various obligations.

Employer responsibilities — Inland Revenue

Hiring and employee

Introduction to tax and levies

Consider the following questions:

• Will you seek investors?
• Do you plan to expand the business?
• Are you interested in selling the business in the future?

It’s advisable to seek advice from professionals in your industry, such as lawyers or accountants who specialise in advising businesses of your type. Additionally, speaking with individuals who have opted for the structure you are contemplating can be useful.

Choose your business structure

The Choose Your Business Structure tool can be a helpful resource in making the most informed decision.

Sole traders are individuals who are either embarking on a new business venture or working as contractors. This structure is popular among small business owners, self-employed professionals, and contractors. It’s an affordable and straightforward option that may be attractive if you’re pursuing your passion or working as an independent contractor.

Upsides include:

• Quick and easy setup process.
• Low startup costs as there are no legal or registration fees.
• Complete control over the business and you get all the profits.
• The ability to offset losses against other income.

Downsides include:

• Being personally liable for all business debts can put personal assets at risk.
• It can also be difficult to secure loans or investments to grow the business.
• Selling the business may be more challenging.

If you begin as a sole trader but later want to establish a company, such as to attract investments more effortlessly, you have the option to do so.

Becoming a sole trader

As a sole trader, you are liable to pay tax on all income earned from your work. However, you can claim work-related expenses to reduce your income tax.

You are solely responsible for all your business debts, including tax and ACC levies, but you have complete control over the business and its profits. At the end of each financial year, you must file an individual tax return with Inland Revenue.

It’s important to note that if you spend more than a certain amount of time in another country, you may be liable to pay taxes there. For example, spending more than 183 days in Australia in any 12-month period makes you a tax resident, even if you’re not there for six continuous months. This is especially important to keep in mind if you travel frequently, such as when exporting goods.

Tax residency status for individuals — Inland Revenue

If you operate a small or temporary business or trade online, you are still subject to consumer laws if you are considered to be “in trade.”

Being “in trade” means that you regularly sell goods or services, or regularly buy to resell. The frequency of your buying and selling activities is important in determining whether you are “in trade” or not.

Understanding consumer laws

Setting up a company is a common choice for businesses that export as it provides legal separation between the owners (directors and shareholders) and the company itself. This limits the owners’ risk in case of any debts or liabilities.

As for the shareholders, they are responsible for paying off the company’s debts only up to the value of their shares. However, they are also entitled to a share in the company’s profits, known as a dividend.

Choosing a company structure for your business may be more complex than other business structures due to certain requirements, such as:

• Liling annual returns with the Companies Office and Inland Revenue.
• There are different tax rules for companies and shareholders.
• The details of directors and shareholders must be provided to the Companies Office.

Before starting a company, it’s recommended to seek advice from people who have experience in starting and running companies, such as business mentors or accountants.

If you think a company structure may be the right choice for your business, refer to these sources for more information about registering your company and what steps to take next.

Starting a company

Types of advice you’ll need

Pros and cons

Upsides include:

• Shareholders’ liability is limited to the amount they paid for their shares.
• The company tax rate is lower than the top personal rates.
• The company has more credibility compared to a sole trader.
• Selling the business is easier because it’s a separate legal entity.
• The business can grow indefinitely since it’s not tied to one person.
• Obtaining funding and investment is easier.

Downsides include:

• Companies are subject to more regulations compared to sole traders and partnerships.
• Companies may require more significant investment to expand and grow.
• Directors of companies need to have a clear understanding of their responsibilities.

Starting a company

Types of advice you’ll need

Hiring an employee

When a company earns a profit, which is the amount left over after deducting expenses, it is required to pay taxes on that income. In case the company decides to distribute its profits to shareholders, the recipients will have to pay income tax on the dividends they receive. However, they may be eligible for tax credits to assist them in fulfilling this obligation.

On the other hand, if a company’s expenses exceed its income, resulting in a loss, it may not be liable to pay any taxes.

Introduction to tax and levies

A partnership is a business arrangement where two or more individuals or entities come together to establish a company. The partners define the terms of their collaboration by drafting a partnership agreement that outlines the division of work, profits, and liabilities.

This type of business structure is often favoured by professionals like architects, lawyers, and accountants due to the potential for pooling resources, skills, and expertise.

Upsides include:

• Sharing the responsibility of running the business.
• Sharing the costs associated with running a business.
• The ability to specialise in and focus on individual strengths and skill sets.
• The potential to bring in more capital investment.
• Having a board to discuss business decisions and strategies with.
• The ability to offset any losses the business may incur against other income.

Downsides include:

• Personal liability for all of the partnership’s debts, which could put individual assets at risk.
• The possibility of paying off a partner’s business debts.

Starting a partnership

In a partnership, the business itself is not subject to income tax. Instead, all profits are divided among the partners, who are then individually responsible for paying income tax on their respective shares.

At the end of each financial year, the partnership is required to submit a tax return to Inland Revenue. Each partner is also responsible for submitting their own individual tax return.

It’s important to note that a partner may be liable for taxation in another country if they spend a certain amount of time there. For instance, if a partner spends more than 183 days (or six months) in Australia within a 12-month period, they may be considered a tax resident there, even if their time in the country is not continuous. This is particularly relevant for those who travel frequently, such as for export purposes.

In New Zealand, the three most common types of business structures are partnerships, companies, and sole traders. However, if these options don’t fit your needs, there are other alternatives available, including unlimited companies, cooperative structures, trusts, and more. You can learn more about these options by clicking on the link provided below.

Other business structures

If you intend to establish a purpose-driven business, it’s essential to exercise even greater care and thoughtfulness.

Building the foundation for your purpose-led business

If you plan to expand your business internationally, it’s important to carefully consider how this will impact your business structure. This may involve deciding whether to establish:

• a branch (an extension of your New Zealand-based company)
• a subsidiary (a company owned or controlled by your New Zealand-based company)
• an entirely new company

“Creating a fixed place of business” abroad can add complexity to your operations, and it may be advisable to avoid doing so for as long as possible.

Creating a fixed place of business overseas could involve various activities, such as:

• setting up an office
• hiring employees
• working with agents in a manner that could lead them to be considered staff.

Complexity can include:

• Navigating and complying with foreign rules and regulations.
• Incurring ongoing compliance costs and potentially having to pay foreign taxes at both the state and federal levels.
• Facing difficulties when repatriating funds back to New Zealand.
• Adhering to regulations that govern the allocation of costs and profits to different parts of the business in various countries.
• You may have to take more steps to leave a country if you stop doing business there.

On the other hand, if you are able to operate without a fixed place of business overseas, the process is typically simpler. You would generally only need to pay taxes in New Zealand, and receiving payment for your services is often as straightforward as invoicing a client overseas and accepting payment via bank transfer or credit card.

If you set up overseas