You’ve started or are about to start up a business; it’s time to discuss business structures. Sure, it doesn’t sound like the most interesting of topics, but it’s one that can have a significant financial impact upon your future.
Every business in New Zealand must have a chosen structure. The structure of a business affects the way in which it works, how it is treated by the government and what laws apply to it. As a business owner, it is your decision as to which type of structure you choose. Your decision will impact upon the amount and type of administration you must do, the amount of tax you pay, your business’ legal status and if you can sell shares belonging to your business. If you don’t state a business structure, you will by default be classed as a sole trader. The best advice we can give, is before you choose, make sure you understand the ins and outs of each structure type. We’re giving you a short run down today, but for personalised advice, come and see us.
In NZ, there are three main types of business structures:
- Sole trader
- Limited company
- Partnership
Other less common business structures in New Zealand are:
- Unlimited companies
- Co-operative companies
- Trusts
- Charitable trusts
- Incorporated societies
- Limited partnerships
- Industrial and provident societies
- Friendly societies
- Building societies
- Credit unions
Each of these structures has different legal and financial obligations. In this article, we’ll stick to explaining more about the three common structures, plus how to choose the right structure type for your business.
Exploring NZ’s Top Three Business Structures
While we work with all types of business structures, these are the three we most commonly deal with: sole trader, limited company and partnerships.
Sole Trader
Sole traders are people who start or own a business on their own, without registering it as a company. It is the easiest and cheapest type of structure for a business. With no legal fees, complete control of your business and the ability to offset losses against other bits of your income, there are plenty of pros. On the other hand, the cons are that it can be a hard business type to grow, sell or gets loans for, and you are liable for all debts.
You can hire employees to help you run your business but will need to register as an employer with IRD first. You will need to pay tax on all your income but can claim on expenses for things needed to run your business.
To become a sole trader, you need your own IRD number, any required licenses or permits for your business industry, and any qualifications to work in your industry. Like all businesses, you’ll be expected to keep accurate financial records and if you earn more than $60K per year, you will need to register for GST.
Limited Company
If you are an NZ resident, you can set up a limited company. A company gives you legal protection that being a sole trader does not. As a company, it is separate from you personally, but that doesn’t mean you aren’t liable for its debts.
You can have both shareholders and directors in a company but must file annual returns with the IRD and Companies office. You need to let the Companies Office know who your directors and shareholders are, and when paying tax, a shareholder and a company have different rules to follow.
The pros of choosing a company structure are that you’ll have more standing in the business community, it will be easier to sell, grow and obtain loans for, plus there is a lower tax rate for a company than the top personal tax rate. The cons are that there are more regulations to follow and responsibilities to comply with.
You pay tax based on your company’s profits and can distribute profits to shareholders. You can also hire employees but will need to register with the IRD as an employer.
To start up a company, you will need to reserve your company name, choose directors, register for tax as a company, and issue shares. There’s a complex list of tasks needed, and we suggest reading the information on the New Zealand Companies Office website initially. It is also a decision best made with professional business advice, of which we can offer you.
Partnership
A partnership structure is when two or more people or organisations start a business. There is a clear agreement as to who pays for what, who receives what and who will do the work. It is generally used by professionals, such as lawyers or doctors.
The pros of choosing to use a partnership are that it is not just you running the business, and each partner can focus on doing what they do best. You can share the costs for the business, and partners can bring in some much-needed money. However, in a partnership, you are all liable for any of the debts the partnership has or will have, including those of your business partner.
It is possible to hire employees, and once again you’ll need to tell the IRD that you are an employer. When it comes to paying tax, the partnership doesn’t pay tax. As the income is shared between all the partners, it is the responsibility of each partner to pay their tax instead.
How to Choose the Right Business Structure
Like we’ve mentioned above, when making the decision as to which business structure to move forward with, get professional advice first. While there’s nothing wrong with simply picking to be a sole trader upfront, and indeed lots do, if you want to change to a company at a later stage, you’ve got extra complications ahead of you. Our business development services can help you clarify right from the start where you want and should be, and there’s nothing better than getting things right from the word go.
To take the DIY route, as well as learning about the different business structures, there is a handy online tool which can help you decide. Found on the Ministry of Business, Innovation and Employment website, there is a quick questionnaire which asks you three questions. From your answers, it gives you what it believes is the most appropriate structure for your business.
There are some questions that you should ask yourself anyway, and should you be meeting with us, we’d ask you these (and more) too:
- How many business owners will there be?
- Do you want investors in the future?
- Will you want to sell the business in the future?
- Will there be any large loans, debts or costs in the future?
- How much ‘protection’ or ‘space’ do you want between your business and your personal assets?
Let’s meet up for a coffee and chat about your plans and ideas for your business. We’d love to learn more and help you make the right business structure choices from the word go. Get in touch with our business advisors today!