The 4 most common business structures in NZ

Choosing the right structure when you start a business in New Zealand is one of the most important decisions you will make, and it is one that is worth revisiting as your business grows. Each structure has different implications for how you are taxed, your personal liability, and how the business can be owned or sold.

Here is a plain-language overview of the four most common options.

Sole trader

A sole trader is the simplest structure. You operate as yourself, under your own name, and report your business income on your personal tax return at your personal tax rates.

It is easy to set up and low in compliance cost, which is why it is popular for freelancers, contractors, and people just starting out. You can still employ staff and register for GST as a sole trader.

The main limitation is that there is no separation between you and your business. If the business has debts or legal obligations, you are personally responsible for them. As a business grows or becomes more complex, this exposure is often the reason people move to a company structure.

Because sole trader income is taxed at personal rates, which can be higher than the 28% company tax rate, it is worth reviewing your structure periodically to make sure it still makes sense for your situation.

Limited company

A limited company is a separate legal entity from its shareholders. It files its own tax return, pays its own tax, and its liabilities are limited to the company itself. Shareholders are generally only exposed to the amount they paid for their shares.

A company can have one shareholder or many. Shareholders can be individuals, trusts, or other companies, which gives flexibility in how ownership and income are structured. Companies are governed by the Companies Act and require a constitution and, ideally, a shareholders agreement if there is more than one owner.

A closely held company has fewer than five shareholders and is the most common structure for small and medium businesses. Some companies opt for Look Through Company (LTC) status, which means the company is treated as transparent for tax purposes and income and losses flow through to the shareholders' personal returns.

Partnership

A partnership is a structure where two or more individuals operate a business together and share its profits and losses. Each partner pays income tax on their share at their personal rates.

There is no separation between the partners and the business. Each partner can be held personally liable for the debts of the business, including those incurred by the other partners. Partnerships are governed by the Partnership Act.

There is also a Limited Partnership structure under the Limited Partnerships Act 2008, which allows some partners to have limited liability. This is more commonly used for investment structures than for trading businesses.

Joint venture

A joint venture involves two or more parties, usually other businesses, pooling resources to carry out a specific project or activity. It is governed by a joint venture agreement between the parties rather than a specific piece of legislation.

In a joint venture, each party returns its own share of the profit or loss on its own tax return, unless the venture is incorporated as a company, in which case a separate filing is required. Neither party is liable for the other's debts.

Joint ventures are typically used for a specific project rather than as an ongoing business structure.

Which structure is right for you?

There is no universal answer. The right structure depends on your income level, your risk exposure, your plans for the business, and your personal circumstances. What works when you are starting out may not be the best fit once you are turning over a million dollars a year or taking on a business partner.

Reviewing your structure is something we do with clients regularly. If yours has not been looked at recently, it is worth a conversation.