Doing Business in New Zealand: Why Consider Setting Up a Company Instead of Being a Sole Trader?
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In New Zealand, you can start your business as a sole trader without any formal registration. Your business tax number is simply your personal IRD number, and you pay tax based on your personal tax rate. However, as your business grows, you may need to hire employees, which can expose you to legal risks. At this stage, transitioning to a company structure could provide several advantages and help your business expand.
1. Limited Liability Protection
One of the primary benefits of operating as a company is the limited liability protection it offers. As a sole trader, if your business cannot pay its debts or faces legal issues, your personal assets are at risk. In contrast, a company is a separate legal entity, meaning that the company itself is responsible for its debts and obligations. This separation can provide shareholders with some degree of personal legal protection.
2. Enhanced Credibility and Image
Operating as a company can improve your business’s credibility and image. To customers and suppliers, a company often represents a more established and stable entity, making it appear more reliable and trustworthy. However, it’s worth noting that banks may still require personal guarantees from shareholders when lending to small companies.
3. Easier Collaboration and Succession Planning
A company structure makes it easier to bring in business partners. You can issue or transfer shares to new partners, and existing supplier and customer contracts remain unchanged. Companies are also useful for succession planning, allowing the business to gradually pass on to key employees or family members, ensuring its continuity.
4. Tax Planning Flexibility
Companies usually have more options for tax planning than sole traders. As a sole trader, you pay tax at your personal income tax rate, which is currently 33% for income between NZD 78,100 and NZD 180,000, and 39% for income over NZD 180,000. In contrast, companies pay a flat 28% tax rate on retained earnings, which can be beneficial if you want to reinvest profits into business growth. However, it’s important to remember that company funds are not personal funds; any money withdrawn from the company is effectively a loan to the shareholder.
5. Company Registration and Ongoing Compliance Costs
To establish a company, you need to register with the NZ Companies Office, which costs NZD 148.05. Additionally, you must file an annual company return with the Companies Office, which costs NZD 57.20 each year. While there are additional compliance costs, the benefits of a company structure often outweigh these expenses, especially as your business grows.
Other Business Structures to Consider
Apart from a company, other business structures like Limited Partnerships (LPs), Look-Through Companies (LTCs), and trusts may also be worth considering, depending on your specific business situation. These structures can offer additional benefits and protections tailored to different business needs. We will cover these options in more detail in future posts.
Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact The Number Studio office.