When starting a business in New Zealand, one of the crucial decisions you’ll need to make is choosing the right business structure. Your choice will impact various aspects of your business, including legal responsibilities, tax obligations, and personal liability.
Let’s explore the three main business structures in New Zealand and how they differ:
- Sole Trader: As a sole trader, your business is essentially an extension of yourself. This structure is the simplest and most common for small businesses. You are personally responsible for all aspects of the business, including its profits, losses, debts, and liabilities. While this offers you complete control, it also means your personal assets are at risk if the business runs into financial trouble.
- Company: A company is a separate legal entity from its owners (shareholders). This structure offers limited liability protection, meaning that the owners’ personal assets are generally protected from business debts and liabilities. Companies have more complex legal and financial obligations compared to sole traders and partnerships but they have the advantage of easily transferring shares, and therefore ownership, on a progressive basis. Keep in mind that a company must comply with the Companies Act 1993 and maintain accurate financial records.
- Partnership: In a partnership, two or more individuals share ownership and management responsibilities. Partnerships can be general partnerships, where all partners share equally in profits and liabilities, or limited partnerships, where some partners have limited liability. Partnerships can be flexible and beneficial for sharing workload and expertise. However, partners are jointly and severally liable for the business’s debts and obligations, which means they share both the profits and the risks.
There are other business structure options such as trusts and cooperatives, we suggest you seek professional advice if you’re thinking about choosing one of these options.
Choosing a business structure tool
To help you make an informed decision, the New Zealand Ministry of Business, Innovation & Employment (MBIE) offers a helpful tool to guide you through choosing the right business structure. You can access this tool here and answer a series of questions to find out which structure aligns best with your goals, risk tolerance, and long-term plans.
Ultimately, the right business structure depends on factors such as your business goals, the level of control you desire, your risk tolerance, and tax considerations. Choose wisely, as your business structure can significantly impact your success and financial well-being. Consulting with your accountant or legal advisor can also provide valuable insights tailored to your specific situation. Please get in touch if you would like to discuss your options with us.