The structure of your business – whether a sole trader or a company – has significant implications for taxes and financial responsibilities. Here’s a breakdown to help you navigate the differences and make informed decisions.
Sole Trader
A sole trader is the simplest business structure where you and your business are the same legal entity.
Tax Implications:
- Income Tax: All business profits are treated as personal income. You’re taxed at individual income tax rates, which in New Zealand range from 10.5% to 39%, depending on your income. Losses can offset your other personal income, potentially reducing your overall tax liability.
- GST (Goods and Services Tax): If your turnover exceeds $60,000 per year, you must register for GST. You’ll need to file GST returns regularly.
- Provisional Tax: As a sole trader, you’ll likely need to pay provisional tax if you owe more than $5,000 in tax at the end of the year.
- No Separate Tax Entity: Since you and the business are the same entity, there’s no need to file a separate company tax return.
Financial Responsibilities:
- Personally responsible for all debts and liabilities.
- Limited ability to retain profits in the business for future growth, as profits are taxed at personal rates.
Company
A company is a separate legal entity from its owners (shareholders).
Tax Implications:
- Corporate Tax Rate: Companies pay a flat 28% tax on their profits in New Zealand, which can be lower than the top personal tax rate (39%).
- Dividend Tax: When profits are distributed to shareholders as dividends, these may be subject to imputation credits and taxed at the shareholder’s personal tax rate. Careful tax planning is essential to avoid double taxation.
- GST: Similar to sole traders, companies must register for GST if annual turnover exceeds $60,000.
- Provisional Tax: Companies must also pay provisional tax if they meet the $5,000 threshold.
- Loss Carry-Forward: Companies can carry losses forward to offset profits in future years, which provides long-term tax efficiency.
Financial Responsibilities:
- Limited liability protects your personal assets, as the company is responsible for its own debts.
- More robust record-keeping is required, including separate financial statements and annual tax returns.
- Retained earnings can be reinvested in the business for growth.
Key Considerations:
- Tax Rates: If your income is below $70,000, a sole trader structure might work well as you benefit from lower marginal rates. If your income is higher, the flat 28% company tax rate could be advantageous.
- Liability: A company structure limits personal liability, which is critical for businesses with higher risks.
- Administration: Sole traders have less compliance and paperwork, making it easier to manage. Companies require more reporting and governance, including meeting shareholder obligations.
- Growth Potential: Companies provide greater flexibility for raising capital and retaining earnings for reinvestment.
Which Is Right for You?
- If you’re just starting, have lower income, or prefer simplicity, a sole trader structure may suffice.
- If you’re growing, want liability protection, or need to separate your personal and business finances, a company structure is worth considering.
Final Tip: Tax and financial considerations can vary depending on your business goals and circumstances. Consult a tax advisor or accountant to evaluate the best structure for your needs.
The content in this blog is intended to provide general insights and should not be regarded as professional advice. Each business situation is unique, and we recommend consulting with a professional for specific guidance. At Black Arrow Business Studio, we specialise in accounting and consulting services designed to support your business’s growth and success. Feel free to contact us for expert advice and customised solutions.
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