What is the best structure for your business?
Updated: Jul 24, 2018
What options are available to you when you are setting up a business?
Sole Trader, Partnership, Limited Liability Company, LTC or Trust.
Small businesses generally employ one of these business structures in New Zealand.
A sole trader operates the business on his or her own. He or she:
Controls, manages and owns the business
Is personally entitled to all profits / losses
Is personally liable for all business taxes and debts
Tax is paid at the individuals tax rate
Usually a sole trader can begin the business without following any formal or legal processes to establish it. He or she may employ other people to help run the business. Large numbers of business operate as sole traders. No registration is required to start a business as a sole trader. All you need is a personal IRD no.
In a partnership, two or more people run a business together. Each partner:
Shares responsibility for running the business
Shares in any profit or loss equally, unless the partnership agreement states otherwise
Is liable for any debt within the partnership
Many partnerships are established with a formal partnership agreement
Tax is paid at the partners individual tax rates
The partnership itself does not pay income tax. Instead it distributes the partnership income or loss to the partners. No registration is required to start a business as a partnership; it may be separately registered with the IRD.
Limited liability Company
A company exists as a formal and legal entity in its own right. It is separate from its shareholders (or owners) and directors (legal managers).
Owns the assets and liabilities of the business
Its owners liability is limited to the shareholding of the business
Its directors run the business
Ownership can change through a transfer of shares without changing the ownership of the assets owned by the company.
Tax can be paid at 28% by the company or shareholders can earn salaries and pay tax at their own tax rates. Tax paid dividends can be used to distribute profits.
Look Through Company
This is a special form of company that allows losses and profits to pass to the shareholders without tax. There are limitations on the ownership and the amount of losses that can be claimed each year.
The rules set in 2011 are currently being reviewed by the IRD.
Must have 5 or fewer look through counted owners
Shareholders must be natural persons, trustees or look through company
Profits and Losses pass to owners according to their shareholding
Shareholder / Employees must be on PAYE
Disposals of property may be taxable
Tax is paid by the “Look Though Owners” at their tax rates
A trust is a legal structure where ownership is with the trustees who hold assets for the benefit of beneficiaries of the trust. For tax purposes income earned can be distributed to beneficiaries with certain restrictions. Losses remain in the trust until used.
Ownership is in a separate legal structure to both beneficiaries and trustees
Trustees run the trust and maybe personally liable
A company can be a trustee
Trusts are excellent structures for asset protection provided that they are properly administered
Income can pass through a trust to beneficiaries over 16 at their tax rates
Trustees income is taxed at 33%