When you’re in those early stages of setting up your business, it’s important to understand the different type of business structures available and what type is going to suit your business best.
We’ve highlighted three of the most common types of business structures in New Zealand and some of the key features of them. Here is some useful information from the New Zealand government on different options:
Sole Traders
This is a popular option for many small business owners when they are first starting out and doesn’t require you to register your business as a company. It is one of the cheaper and easier of the types of business structures available.
These are some of the features of a sole trader business structure:
- Quick to establish
- No legal or registration fees
- You have control of the business and receive all the profits
- Option to offset losses against other income
- You are responsible for paying back any debts, this could potentially put your personal assets in a risky position
- There can be challenges when trying to grow your business with investments and loans
- If you hire staff to help run your business, you will need to register with Inland Revenue as an employer and ensure that you meet any of the obligations.
- You will need to pay tax on all your income earnt from working
- Work expenses can be claimed to reduce your income tax
- You responsible for business debts like tax and ACC levies
Companies
The structure of a company is independent from the people who own it, the directors, and shareholders. The shareholders are accountable for paying the companies debts, up to the value of the shares they may own in the company. Shareholders are also entitled to a share of the company’s profits, this is known as a dividend.
A company is a bit more involved than that of the sole trader business structure. Annual returns must be filed to both the Companies Office and Inland Revenue and there are specific rules around how the company and shareholders need to pay tax.
It’s a good idea to have a chat to your accountant or other financial professional to get some advice around the structure and if it is the best option for your business due to it complexity.
Here is an overview of some of the key features of a company structure
- You must provide details of your company’s directors and shareholders to the Companies Office
- The tax rate for a company is lower than the top rank of personal rates
- As a business structure, a company has more credibility and is easier to sell as business because it is a separate entity
- It is more regulated than a sole trader structure
- Make sure you understand your responsibilities as the director of the company
- When hiring staff make sure the company registers as an employer with Inland Revenue. You will also need to meet certain obligations.
- If your company’s expenses exceed its income, it may make a loss and not need to pay any tax
Partnerships
A partnership structure involves two or more people or an organisation gets together to form a business. From the start, a partnership agreement is established, outlining how the profits, debt and work will be shared.
The partnership business structure is a common option for professionals like lawyers and accountants.
Some of the key features of a partnership business structure include:
- The costs of the business are shared
- Partners can provide more capital investment
- Partners can offset losses against other income
- There are more people involved to talk about the business and to help it grow
- Personal assets may be at risk, as each partner is responsible for all the partnership debts
- When hiring staff make sure the company registers as an employer with Inland Revenue. You will also need to meet certain obligations.
- Partnerships don’t pay income tax as a business. All of the incomes is distributed between the partners who then pay income tax on their share
Other types of business structures
These are some of the other types of business structures that are available in New Zealand:
- Limited Liability companies
- Unlimited Liability companies
- Co-operative companies
- Trusts
- Charitable trusts
- Incorporated societies
- Limited partnerships
- Industrial and provident societies
- Friendly societies
- Building societies
- Credit unions
Further information regarding these structures can be found here.
Things to consider
These are some of the things to keep in mind when your deciding which type of business structure to go with:
- What costs are involved in starting up the business
- What are your tax obligations and rates
- Understand what your legal obligations and liabilities are
- How easy is it to access finance to give your business extra security if required
- What are your administration requirements
Once you have a clear understanding of which structure is right for your business, you may also need to consider getting your business insurance sorted. There are many different types of insurances available to suit a range of different types of businesses and their unique risks.
At Public Liability Insurance, you can access multiple quotes to compare from selected leading New Zealand insurers, letting you choose the right cover to protect your business.
Experience insurance made easy in the click of a mouse, getting your business protected in minutes.
* This information is a general guide only and does not take into account your objectives, financial situation or needs. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording. The information contained on this web page is general only and should not be relied upon as advice.
Public Liability Insurance is a trading name of BizCover Limited. BizCover Limited is owned by BizCover Pty Ltd (ABN 68 127 707 975).
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