Starting a business is exciting, but one of the first decisions you'll need to make is how to structure it.
Should you operate as a sole trader, register a limited company or go into business with someone else as a partnership?
Each option has different implications for tax, personal liability, paperwork and how you manage your business finances.
The good news? You don't need to understand every accounting term to make an informed decision.
Let's break down the main business structures in New Zealand and what you should consider before choosing one.
1. Sole Trader — Simple and Straightforward
A sole trader is someone who runs a business in their own name, rather than through a separate company.
It's one of the simplest ways to start a business in New Zealand.
For example, if you start offering cleaning services, consulting, beauty treatments or small-scale retail services on your own, operating as a sole trader may be suitable.
How does it work?
- You use your personal IRD number for your business income.
- You report your business profit through your individual income tax return.
- Your business profit is taxed at your personal income tax rates.
- You generally have fewer setup and ongoing administration requirements than a company.
- You are personally responsible for the business's debts and obligations.
Something to keep in mind: As a sole trader, there is no legal separation between you and your business. This means your personal assets could be at risk if the business cannot meet its obligations.
Practical tip: Even though you're not required to register a company, it's a good idea to keep your business finances separate from your personal spending. A dedicated bank account can make record keeping and tax preparation much easier.
2. Limited Company — A Separate Legal Entity
A limited company is legally separate from its shareholders.
This means the company can enter into contracts, own assets and incur liabilities in its own name.
A company may be worth considering if you're planning to grow, take on business partners, employ staff or operate a business with greater commercial risks.
How does it work?
- The company is registered with the New Zealand Companies Office.
- It has its own IRD number and tax obligations.
- Most companies pay income tax at 28% on taxable profits.
- Directors and shareholders have separate legal responsibilities.
- The company must meet annual filing and record keeping requirements.
Does having a company mean you only pay 28% tax?
Not necessarily.
This is a common misunderstanding.
Although most companies pay income tax at 28%, money you receive personally from the company may have further tax implications depending on whether it's paid as salary, wages, dividends or another form of distribution.
A company structure doesn't automatically mean you'll pay less tax overall.
For example, if your company earns $100,000 in taxable profit, the company tax at 28% would be $28,000, assuming the full amount remains taxable in the company. However, if you receive money personally through a shareholder salary or dividends, the overall tax position may be different. This is why the 28% company tax rate shouldn't be the only factor when choosing your business structure.
Practical tip: Don't choose a company solely because its tax rate is 28%. Consider the cost of running the company, how you'll withdraw money, the risks involved and your longer-term business plans.
3. Partnership — Running a Business Together
A partnership generally involves two or more people carrying on a business together with a view to making a profit.
For example, two friends might start a café, or family members might operate a business together.
How does it work?
- The partnership generally files its own income tax return.
- The partners are taxed individually on their share of partnership income.
- A general partnership doesn't usually pay income tax itself.
- Partners can be personally responsible for partnership debts and obligations.
- A partnership agreement can set out profit-sharing arrangements, responsibilities and how disagreements will be managed.
Something to keep in mind: Going into business with someone you trust is important, but having clear written arrangements is equally important.
Practical tip: Before starting a partnership, agree on how profits will be shared, who can make financial decisions, what happens if someone wants to leave and how disputes will be resolved.
4. What About a Trust?
A trust is another arrangement you may come across when considering business ownership or asset protection.
In New Zealand, trusts can hold business assets or shares in a company, depending on the circumstances.
However, trusts involve additional legal, accounting and tax considerations.
The trustee income tax rate in New Zealand is generally 39%. However, trustee income of $10,000 or less in a tax year is generally taxed at 33%, subject to certain exceptions and special rules.
Practical tip: A trust isn't automatically the best option for asset protection or tax savings. It's worth getting both accounting and legal advice before establishing one.
5. Which Business Structure Is Right for You?
There's no single structure that works best for every business.
Here's a simple comparison:
| Feature | Sole Trader | Limited Company | General Partnership |
|---|---|---|---|
| Separate legal entity | No | Yes | No |
| Income tax | Personal rates | Generally 28% | Partners' personal rates |
| Personal liability | Generally unlimited | Generally limited, with exceptions | Generally unlimited |
| Setup | Simple | More formal | Relatively simple |
| Ongoing administration | Lower | Higher | Moderate |
| Multiple owners | No | Yes | Yes |
Questions Worth Asking Before You Decide
- Are you starting the business on your own or with someone else?
- What financial or legal risks could the business face?
- How much profit do you expect the business to make?
- Will you need to withdraw most of the profit for personal living expenses?
- Are you planning to employ staff, bring in investors or expand?
- How much ongoing administration are you comfortable managing?
The answers can help determine which structure is most suitable for your circumstances.
6. Can You Change Your Business Structure Later?
Yes, it's possible to change your business structure as your circumstances change.
For example, you might start as a sole trader and later move to a limited company as your business grows.
However, changing structures isn't always as simple as registering a new company.
Depending on your circumstances, transferring business assets, stock, contracts or goodwill may create tax, GST or legal implications.
Practical tip: Before changing your structure, get advice on what needs to be transferred and whether any tax consequences could arise.
7. Don't Forget About GST
Your business structure and GST registration are two separate considerations.
In New Zealand, businesses generally need to register for GST if their taxable turnover is at least $60,000 in a 12-month period, or is expected to reach that amount in the next 12 months.
You may also need to register if you add GST to your prices.
This applies whether you operate as a sole trader, company or partnership.
Practical tip: Monitor your turnover from the beginning. The GST threshold is based on taxable sales, not profit.
The Bottom Line
Choosing a business structure isn't just about deciding whether to register a company.
It's about understanding how your business will operate, what risks you're taking on, how profits will be taxed and what your longer-term plans look like.
A sole trader structure may be perfectly suitable for one business, while a limited company or partnership may make more sense for another.
The right structure is the one that suits your circumstances — not necessarily the one with the lowest headline tax rate.
Need Help Choosing Your Business Structure?
At Clearstep Chartered Accountants, we provide accounting and tax services to help New Zealand business owners understand their options and make informed decisions about their tax obligations.
Whether you're starting a new business, considering moving from sole trader to company or reviewing your existing arrangements, we can help you understand the financial and tax implications.
Get in touch to arrange a consultation and discuss which structure may be suitable for your business.
Clearstep Chartered Accountants
Clear Advice. Transparent Fees.
www.clearstepca.co.nz
This article provides general information only. The appropriate structure depends on your individual circumstances, and legal advice may also be required.