Choosing the right business structure for your start up
Luckily for us Kiwis, New Zealand is globally renowned for being one of the easiest countries in the world to start a new business – quick, hassle-free and inexpensive. The majority of the set up can be completed online in just a few hours. But before you start filling in forms, the first thing to decide is what business structure is most suitable.
Here, we’re going to look at the different types of business structures available in New Zealand.
What: A sole trader is a person who runs a business on their own, as part of their personal finances.
Who: Self employed tradespeople, contractors, small business owners and some professionals.
Pros: Quick, easy and cheap – you can set up online and there’s no registration or legal fees to worry about. Because you’re a ‘sole’ trader, there’s only yourself to think about; you’re in control of the business and the profits go straight into your back pocket (although you can still have employees). You’re also able to offset any losses within the business against your other income which can make a big difference come tax time.
Cons: Your business is considered part of your personal finances, meaning you’re personally responsible for any debts incurred – which could lead to personal assets being at risk. It can also mean that it’s harder to get a loan or investment, and potentially more difficult to sell on as a business later.
What: A partnership is when two (or more) people run a business together, sharing the personal responsibility for income and debts of the business through a partnership agreement to determine rights and responsibilities.
Who: Professionals, e.g. architects, lawyers and accountants.
Pros: The main benefit of a business partnership comes down to ‘sharing the load’ – whether this is sharing costs, responsibilities or decision-making. Running a business requires a wide range of skills, so having multiple partners means people can work to their specific strengths, maximising business efficiency.
Cons: Each partner is equally responsible for the partnership’s debts, which again, can lead to personal assets being at risk. If your partner can’t pay, then you could be responsible for all the debt.
Limited liability company
What: A company is when one or more shareholders own the business, which is considered legally financially separate from the people that own it.
Who: People who wish to grow their business, or business owners who don’t want to have their personal finances/assets involved.
Pros: Setting up as a company can prove to be a ‘safe’ option, with shareholders liability limited to the value of their shares. There’s generally more room for the business to grow and develop, and it’s easier to get investment or sell the business because it’s a separate entity. Tax rates are usually lower than personal rates.
Cons: A company can be more complicated than other business structures from a tax perspective, with annual returns filed to both IRD and the Companies Office, and the rules for how tax is calculated differs. There is more legal compliance required, compared to sole traders and partnership structures.
Often, people start businesses because they want to make a profession out of something they’re good at, but running a business requires a whole multitude of skills. It always pays to have assistance for those areas you’re less confident in – consider getting some help on board from the beginning, e.g. an accountant, mentor and a lawyer.
Check out our recent article Going Solo: Starting Out as a Sole Trader for some handy tips to get you underway. You could also try: