Last week we discussed the legal obligations faced by business owners. When you are starting, buying or acquiring a business, you must choose a structure that your business will assume. A business structure will depend entirely on the industry, business size, and the involvement of partners or shareholders.
In New Zealand, there are three main business structures that will afford you different benefits. We have discussed the pros and cons for each, but as with all major business decisions, talk to your lawyer and accountant who will help you determine the most beneficial and low risk structure for your personal situation.
As the title suggests, the business is owned by you, in your name or under a business name. A sole trader is the ideal structure for smaller business such as store owners, plumbers, or online ecommerce sites. Setting up a sole trader is very simple as you do not have to go through the legal process of registering your business with a government agency. A sole trader can be set up with just an IRD number for tax purposes (personal IRD is fine for sole traders), and the necessary permits or qualifications to carry out your trade.
As a sole trader, you can employer other staff, but you must meet the legal obligations as an employer including registering with the Inland Revenue and ACC.
- Simple and quick to get your business up and running.
- As you are the sole proprietor, you control the whole business including big decisions.
- You keep all the profits.
- No registering with government agencies unless employing staff.
- You’re your own boss so can work to a flexible schedule.
- You are taxed at a progressive individual rate.
- You are liable for all the decisions which may not be in your area of expertise.
- Unlimited liability – you are liable for all debts.
- The structure is not as appealing to investors or potential buyers.
- Limited by capital and potential growth.
A partnership agreement involves two or more partners taking shared liability of the business. Similar to a sole trader, each partner is personally liable for all debts. A partnership does not have to be registered with government agencies, and personal IRD numbers can be used as each partner will be taxed on their income. If you choose this structure for your business, it is essential that you form a partnership agreement stating share divison, roles and expectations. If you do not create an agreement, you will be governed by the Partnership Act 1908.
- Shared expertise, funds and resources.
- Shared liability of risk, profits and loss.
- Easy to set up – you do not have to formally register a new partnership.
- Partners are taxed on their income and not as a business.
- You are responsible for the actions of the other partners including business loans.
- You are not in full control of the business decisions.
- Conflicts, disagreements and compromises can all affect the potential for business growth.
This is the most popular structure for small to medium sized businesses in New Zealand. Unlike the other two structures, the company is a legal entity in its own right. The owners or shareholders, whether sole or partners are not personally liable for the accrued debts of the business or other partner. They are however liable for debts owing to the liquidator on their shares should the business become insolvent.
- There is more credibility which is appealing to potential investors, shareholders or buyers.
- Separate entity.
- Liability for losses is limited to the share of the company.
- Tax is a flat rate and does not rise with income.
- More time consuming and expensive to set up than the other structures
- Heavily regulated by governing agencies.
- Must comply with with extensive legal responsibilities, which may become personal liability if the company has traded recklessly.
- Limited liability can be reduced with personal guarantees against the loans.
If you need business advice, do not hesitate to contact the team at MBC Law.
These articles discuss New Zealand law, and are for informational purposes only. They do not constitute professional legal advice. Please consult MBC Law for information specific to your circumstances.