Figuring out what business structure best suits you and your business needs, can be confusing to say the least. Not only are there are many personal factors that you will need to take into account when deciding, but there are also benefits and drawbacks for each.
The three most common structures in New Zealand are Sole Trader, Partnership and Company.
Sole traders are individuals that go into business on their own, and have relatively low start up costs. Being a sole trader is often referred to as being a contractor or being self employed, but whether you have one client or many, a sole trader is responsible for their own taxes and liable to cover any debts that the business my incur. Sole traders do not need to register as a company, nor do they need a separate IRD number from the individual, but they can trade under a trading name and are now able register for a NZ Business Number.
Partnerships are formed when two or more entities come together to run a business. These individuals/groups may enter into a partnership agreement to set out how the profits of the partnership are split, or they may simply choose to divide them evenly between the themselves, but like sole traders each partner is responsible for the debts of the business. Partnerships need a new IRD number and taxes on the profits are apportioned to the partners in the same ratio as the profit share. Partnerships are great for sharing work and knowledge, but partners should be aware that any wrong doing by one of the partners may have an adverse effect on the partnership even if the other partners had no involvement in the wrong doing.
Companies are a bit more complicated – they are legally required to have their business name registered on the Companies Register, they must have a unique IRD numbers. A company is a legal entity, separate from the shareholders that own the company, meaning that a company is independent from the people making the decisions for the company, and the shareholders of the company are liable for any company losses proportionate to the amount of shares they hold. A company has a greater number of compliance responsibilities than a sole trader or partnership. Companies not only have compliance responsibilities with Inland Revenue, but also the Companies Office and will have to file an annual return.
All three structures can be registered for GST and employee staff, and will need to register with Inland Revenue and report accordingly.
Some helpful links:
To find out more information on the NZ business number go to www.nzbn.govt.nz
For more helpful info on choosing the right structure www.business.govt.nz/getting-started/choosing-the-right-business-structure/business-structure-overview or go to www.business.govt.nz/choose-business-structure for a great tool to help choose a business structure.