When starting a business one of the many matters to consider is Business Structures. Depending on the number of people involved in the business, owner’s liability, tax implications, costs etc you can choose a structure that is best suited to you. Here are some structures commonly used by New Zealand businesses to enable you to make the right decision.
A sole proprietor is an individual carrying out business under his / her own name. There is no distinction made between the business assets and the personal assets of the individual and they are personally liable for all aspects of the business. Once you register for a NZBN number you are on your way to operate the business as a sole proprietor, making it the simplest and cheapest form of structure.
Partnerships are defined under the Partnership Act 1908. A Partnership is formed when several individuals conduct their business together with a view to make a profit. Like sole proprietor, partnerships are not separate legal entities, and the partners can be made liable for debts and liabilities of the partnership. Profits of the partnership are equally distributed to the partners and taxed at their personal marginal tax rates.
A company is a separate legal entity governed by the Companies Act 1993 and needs to be registered with Companies Office Registrar. The separation between the company and its owners makes it an ideal vehicle to conduct business in as it limits the liability of the shareholders and directors to the company. This is however, the most expensive and complex structure to setup and maintain due to ongoing administrative requirements under the Companies Act 1993. Company profits are taxed at a flat rate, which is current set to 28%.
The look through company regime was introduced in April 2011 effectively replacing the loss attributing qualifying companies. LTCs are separately legal entities and transparent for tax purposes. The profits or losses are passed through to the owners and taxed at their marginal tax rates. There are certain requirements for becoming a LTCs and a valid election needs to be made with IRD for gaining this status. LTCs are companies and administered under the same Companies Act 1993.
A Trust can be established by drawing up and executing a trust deed. The trustees of the trust are responsible for running the business on behalf of it’s beneficiaries. The trust is separate for tax purposes and all trust income not distrusted to it’s beneficiaries must be taxed as Trustee income. Trusts currently have a slight higher tax rates than companies of 33%.
It is highly important to get the setup correct and we strongly recommend you talk to professional. At Business Launchpad we can assist you with all the necessary requirements of setting your business structure so you can focus on what is most important to you, that is running your own business!