Starting a business in New Zealand is relatively easy. Here’s a quick guide to the four most common structures:
- Sole trader
- Limited company
- Joint venture
There is no social enterprise status in New Zealand (NZ). Businesses wanting to operate as a social enterprise can do so, but they are still liable to pay tax on any profit the business makes (whatever the chosen structure).
Becoming a sole trader is one of the most straightforward and popular options for starting a business in NZ. People who want to work for themselves as freelancers, contractors or subcontractors normally use the sole trader structure. While they can have employees, they usually don’t.
Sole trading means that you:
- operate a business under your own name
- return tax under your own personal name and at your personal tax rates
- can still become an employer as a sole trader and you can still become GST registered
- have no separation between your personal and business liability.
Because a sole trader’s income is taxed at the personal tax rates, operating under a sole trader structure can cost you more in tax payable on your income than other structures might. With this in mind, it’s important to review your structure regularly to ensure it’s the best one for you. At some point, you may consider revising your decision and changing your structure to a limited company.
A limited company is another popular business structure in NZ and is an option for anyone who is a resident of the country.
A limited company:
- can be set up with one or many shareholders, who can be individuals, trusts or other limited companies
- is a separate legal entity from its shareholders
- is governed by the Companies Act
- must provide a tax return and pay its own tax liability.
There are different sizes of limited companies in NZ, but a closely held company has less than five shareholders.
The benefit of operating a business out of a limited company is that, as the name suggests, its liability is limited to the company and not transferred onto the shareholders. Shareholders are liable only for any outstanding money owed for the purchase of their shares.
Because shareholders could be individuals, trusts or other limited companies, it’s important to have a valid and correct company constitution, and also a valid and beneficial shareholder’s agreement.
A limited company also has the option of being nominated a Look Through Company, which then has different tax implications. A Look Through Company (LTC) is one where the company structure is “looked through” to the shareholders. The shareholders are responsible to return the income and expenses of the LTC on their own tax returns. This means the shareholders are responsible for the tax on any profit but can claim losses on their own tax return.
A partnership is a recognised structure that can operate as a business.
In a partnership:
- the parties are usually individuals operating a small business.
- there is no distinction between personal and business liabilities
- each partner is liable for the debts the business incurs
- any profit or loss is attributed to the partners at the end of the tax period before the partners pay income tax.
There is no protection of individual partners in this structure and there’s no limitation of liability either. Partnerships are governed by the Partnerships Act.
There is also a Limited Partnership structure governed by the Limited Partnerships Act 2008. This is relatively new to NZ.
A joint venture can be made up of two or more parties and is very similar to a partnership.
In a joint venture (JV):
- the parties are usually other businesses pooling resources to carry out a separate business venture
- usually all the assets and liabilities belong to the parties of the JV and are used to conduct the separate business
- neither party to the JV can be liable for the other party’s debt.
This structure is governed by a Joint Venture agreement between the parties. Each party is responsible for returning its share of profit or loss on its own tax return, unless the JV is incorporated – in which case a separate tax filing is required.