Choosing a business structure

What you need to know

To own and operate a business in New Zealand you need to choose a business structure.  This overview will help you select a business structure that suits your needs.

Possible business structures in New Zealand

Small businesses generally choose one of three business structures in New Zealand.

1. Sole Trader

A sole trader operates a business on his or her own.  The trader controls, manages and owns the business and is entitled to all profits but is also personally liable for all business taxes and debts.

Usually a sole trader can establish the business without following any formal or legal processes and can employ other people to help run the business.

Many New Zealand businesses start as sole traders and then progress to a company structure as the business grows.  Others form companies right from the start to take advantage of the protection and other benefits offered by the company structure. 

Advantages:

• Easy to start and to run
• No registration is required

Disadvantages:

• Owners have unlimited liability for all business taxes and debts, putting their personal assets at risk
• Sole traders can lack credibility in the marketplace
• Harder to attract loans and investment
• Harder to sell the business
• The business only lasts the lifetime of the sole trader

Note

If you do chose to start out as a sole trader you will need to search the Companies Office and the Intellectual Property Office to ensure the name you want is not already protected.  There is no register of trading or business names in New Zealand. To find out how to protect your trade mark visit the Intellectual Property Office of New Zealand (IPONZ)

2. Partnership

Partnerships are most common among professional people and in the farming industry.  In a partnership two or more people run a business together.  Each partner:

• Shares responsibility for running the business
• Shares in any profits 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.

The partnership itself does not pay income tax.  Instead it distributes the partnership income to the partners.  The partners then pay tax on their own share.  For more information on tax obligations visit the Inland Revenue's website at www.ird.govt.nz.

Once the standard business structure of professional people (lawyers, doctors and accountants), partnerships are no longer as popular as in the past since the company structure is now open to professionals and arguably offers better protection.  A well thought out partnership agreement is essential to cover contingencies and possible conflicts.

Note

If you do chose a partnership as your business structure you still need to search the Companies Office and the Intellectual Property Office to ensure the name you want is not already protected. There is no register of trading or business names in New Zealand, to find out how to protect your trade mark visit the Intellectual Property Office of New Zealand (IPONZ).

Advantages:

• No registration is required to start a partnership
• Can be an effective way to share business operation costs (e.g. several professional people operate out of a joint office)

Disadvantages:

• Partners may be liable for debts incurred by other partners
• Putting personal assets at risk
• Possible partnership conflicts
• Possible complications if a partner dies, or wishes to leave the partnership

3. Limited Liability Company

A company exists as a formal and legal entity in its own right.  It is separate from its shareholder(s) or owner(s) - the person or group of people who own shares in the company).  Companies can be registered (incorporated) online through this website (total cost: $NZ160).

The limited liability company has proved to be the most popular and successful form of business structure.  Companies help foster confidence in businesses by governing the relationships between investors (shareholders), directors and creditors and by giving stakeholders a clearer picture of who and what they are dealing with.

Advantages:

• More credibility in the marketplace
• Easier to attract funds and investment (investors can become shareholders)
• Easier to sell the business or pass it on to others as it is a separate entity
• The shareholders' liability for losses is limited to their share of ownership of the company (except when company directors have given personal guarantees for company debts or where a company has been trading while insolvent or is considered to be ‘trading recklessly’)

Disadvantages:

• Directors need to clearly understand their responsibilities
• Limited liability advantages are often eroded in practice by the need to provide personal guarantees to lenders or creditors

Other possible business structures include:

Loss Attributing Qualifying Company (LAQC)

This variation of a company structure involves applying to have your company recognised by the Inland Revenue as a Loss Attributing Qualifying Company.  This gives you a special tax status that allows you to offset any losses incurred in running your business against your personal income from other sources (such as investments).  However, other taxation implications are quite complex, so discuss this option with your accountant or solicitor before making any decisions.  For more information on LAQC companies visit the Inland Revenue's website at www.ird.govt.nz.

To register an LAQC, follow the same process as you would to register a New Zealand company (on this website). You will then need to contact Inland Revenue to establish the status of the LAQC.

Trading Trust

Trading Trusts can offer benefits, but they are complicated and require expert advice.  Discuss this option with your accountant and your lawyer to see if it is more appropriate for your needs than the business structures outlined above.

Co-operative

A co-operative business is owned and democratically controlled by its shareholder/members.

People (or entities) involved in a co-operative business choose to work together to achieve business goals that may not be possible or as easily achieved through individual or separate effort.

The shareholders/members contribute the prime capital for the business and share in the profits of the business in proportion to their participation: the greater the participation, the larger the proportion of profits.

Co-operative Societies also exist for similar reasons, but these operate under different legislation.

An example of a co-operative enterprise is a group of craftspeople banding together to jointly market their various craft products through a co-operatively owned and staffed studio or retail shop.