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Choosing the right business structure

There are more than 500,000 businesses in New Zealand, most of which are made up of three different types of structures - sole trader, partnership and company. Here you'll find some of the key benefits and considerations of each business structure, to help you pin-point which one is right for your business.

Sole trader

This is the simplest business structure, where an individual is legally responsible for all aspects of the business. If you choose to start as a sole trader you'll typically make and be accountable for all the decisions, although you can hire people to help you make the best choices.

Key points

  • You can use your own personal IRD number to lodge tax returns
  • Generally, losses incurred by your business may be offset against your other income
  • You'll need to pay yourself, usually out of a distribution of the business profits
  • You are responsible for your own KiwiSaver contributions

Pros

  • Simple and inexpensive to set up and run
  • Complete control
  • Little ongoing red tape or paperwork
  • No need to register a business name as you can use your own name
  • Relatively easy to change your business structure if you want to expand or stop operating

 

Cons

  • Complete responsibility for the business's liabilities like debts or employee claims - your personal assets are at risk if things go wrong
  • Can be difficult to take time off if you don't have anyone to cover you
  • Can be harder to get finance with the resources of only one person

Partnership

A partnership means that a number of people are responsible for the running of the business. Decision making and financial investment are often shared, potentially lessening some of the workload and risk, but compromises may have to be made to keep all partners happy.

Key points

  • Made up of 2-20 partners
  • Requires a separate IRD number for the partnership
  • Each partner will pay tax on the share of the net partnership income they receive
  • Generally, partners may be able to offset their share of business losses against other income
  • Each partner is responsible for their own KiwiSaver contributions

Pros

  • Simple and inexpensive to run
  • Responsibility is shared
  • Can be easier to get finance as you have the resources of at least two people
  • Little ongoing red tape or paperwork

Cons

  • Each partner shares responsibility for the business's liabilities, regardless of how much of the partnership they own
  • There can be disagreements among partners when working so closely together

Company

Unlike a sole trader or partnership structured businesses, a business with a company structure is a separate legal entity. This means it has its own legal rights and personal liability is limited.

Key points

  • Is a separate legal entity
  • Money earned belongs to the company
  • Generally, the company pays its own income tax based on the corporate tax rate (exceptions can apply); check the latest details on the Inland Revenue website
  • Business operations are controlled by directors and owned by shareholders

Pros

  • Reduced personal responsibility for any business debts and liabilities
  • Flexibility in distributing profits to shareholders
  • Easy to pass on or sell ownership

Cons

  • More complex to start and run
  • More paperwork
  • Higher levels of compliance and set up costs

Other considerations

Knowing your business structure is important when setting up your business, to ensure you understand your obligations when it comes to registering for a New Zealand IRD number, business name, tax and Kiwisaver requirements.

Sole trader, partnership and company are the most common types of business structures in New Zealand, but there are other options, including Trusts. For more information on choosing the right business structure, you could talk to an advisor (lawyer or accountant) or visit business.govt.co.nz and check out the Choosing a Business Structure tool

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