Business Structure Decision – Sole Trader vs Company

Sole Trader – Simplicity and Control

A Sole Trader structure is the simplest and most common form of business entity in New Zealand. It offers complete control over decision-making and operations, making it an ideal choice for solo entrepreneurs.

A Sole Trader is a sole proprietor – an individual who operates a business as the sole owner. It is the simplest form of business structure, in which the individual assumes all the risks and responsibilities of the business.

As a Sole Trader, you have the freedom to make decisions quickly and adapt to market changes effectively. Moreover, establishing yourself as a Sole Trader is relatively straightforward, requiring minimal legal formalities and lower compliance costs.

Paying tax as a Sole Trader

As a Sole Trader in New Zealand, you will be required to pay tax on the profits of your business. Here is how it works:

IRD Number: A Sole Trader uses the IRD number of the sole proprietor. This unique identifier is used for tax purposes and allows you to fulfill your tax obligations.
Goods and Services Tax (GST): If your annual turnover is expected to exceed NZD $60,000, you must register for GST. GST is a consumption tax of 15% on most goods and services in New Zealand. You need to charge GST on your sales and can claim back GST paid on business expenses. GST returns must be filed regularly (monthly, bi-monthly, or six-monthly) and any owed GST must be paid to IRD.
Provisional Tax: As a Sole Trader, you are required to make provisional tax payments throughout the year, which are based on your estimated tax liability. These payments are made in advance to avoid a large tax bill at the end of the financial year. Provisional tax payments can be made either three times a year (standard method) or based on the ratio method. Only a business with over $5,000 of tax liability in the prior year needs to register for provisional tax.
Income Tax: As a Sole Trader, your business income is combined with your personal income for tax purposes. You must declare your business income, expenses, and claim relevant deductions on your personal income tax return. The IRD will calculate your tax liability based on the total income earned, including business profits. The tax rates for individuals vary depending on income levels.
Record Keeping: It is crucial to maintain accurate records of all your business transactions, including income, expenses, invoices, and receipts. These records will help you complete your tax obligations and provide evidence in case of an audit.
Annual Tax Return: At the end of the financial year (31st March), you must file an individual income tax return, which includes your business income and personal income. This return summarises your total income, deductions, and tax liability. It is important to file your tax return by the due date to avoid penalties.

As a Sole Trader, to ensure you meet all your tax obligations, it is advisable to consult Afirmo – we will guide you through the process and help you optimise your tax situation.

Limited Liability Company – Asset protection and Credibility

A Limited Liability Company in New Zealand is a legal business structure that provides limited liability protection to its owners (known as shareholders). This means that the shareholders’ personal assets are separate from the company’s liabilities, and their liability is limited to the amount they have invested in the Company.

Forming a Company for your small business in New Zealand brings several advantages. Firstly, an LLC provides personal asset protection by separating your personal finances from your business liabilities. This means that in the event of business-related debts or legal issues, your personal assets are often shielded from potential risks. Additionally, an LLC structure enhances your credibility among customers, suppliers, and investors, as it reflects a level of professionalism and commitment to long-term success.

Paying tax as a Company

When it comes to tax obligations, a Limited Liability Company in New Zealand follows the following guidelines:

IRD Number: A Limited Liability Company needs to obtain an Inland Revenue Department (IRD) number. This unique identifier is used for tax purposes and allows the Company to fulfill its tax obligations.
Goods and Services Tax (GST): If the Company’s annual turnover is expected to exceed NZD $60,000, it must register for GST. The Company needs to charge GST on its sales and can claim back GST paid on business expenses. GST returns must be filed regularly (monthly, bi-monthly, or six-monthly) and any owed GST must be paid to the IRD.
Provisional Tax: Like sole traders, Limited Liability Companies are also required to make provisional tax payments throughout the year. These payments are based on the company’s estimated tax liability. Provisional tax payments can be made either three times a year (standard method) or based on the ratio method. Only a business with over $5,000 of tax liability in the prior year needs to register for provisional tax.
Income Tax: Limited Liability Companies are separate legal entities from their owners (shareholders). The Company’s profits are taxed separately from the personal income of the shareholders. The Company must file an income tax return (IR4) to report its income, expenses, and claim relevant deductions. The tax rates for Companies are different from those for individuals.
Record Keeping: It is important for a Limited Liability Company to maintain accurate records of its financial transactions, including income, expenses, invoices, and receipts. These records will help in completing tax obligations accurately and provide evidence in case of an audit.
Annual Tax Return: At the end of the financial year (31st March), the Company must file an income tax return (IR4) to report its total income, deductions, and tax liability. It is crucial to file the tax return by the due date to avoid penalties.

It is highly recommended for Limited Liability Companies to work with Afirmo’s for accounting and tax advice to ensure compliance with tax regulations, optimise tax planning, and understand the specific tax requirements applicable to their business.

Sole Trader vs Company business structure

Here are some key points to help you make an informed decision:

Simplicity: Setting up as a sole trader is generally simpler and requires fewer legal formalities compared to establishing a company. As a sole trader, you can start operating your business quickly and with minimal paperwork.
Liability: As a sole trader, you have unlimited liability, meaning your personal assets could be at risk if the business incurs debts or faces legal issues. On the other hand, a company provides limited liability protection, separating your personal assets from those of the business.
Taxation: Sole traders are taxed as individuals, with business profits being included in your personal income tax return. Companies, on the other hand, are subject to corporate tax rates. Depending on your income level and business expenses, one structure may be more advantageous than the other in terms of taxes.
Credibility: Establishing a company may enhance the credibility and perception of your business. It can provide a more professional image, especially when dealing with clients, suppliers, or potential investors.
Growth and Funding: If you have plans for significant growth or need to raise funds from external sources, a company structure is generally more suitable. It can facilitate investment opportunities, issuing shares, and attracting investors.
Compliance and Administration: Companies have more compliance requirements than sole traders. They need to maintain company records, file annual returns, and adhere to specific legal obligations. Sole traders have fewer administrative burdens in comparison.

Ultimately, the decision between setting up as a sole trader or a company in New Zealand depends on your specific circumstances, such as the nature of your business, your growth plans, liability concerns, and personal preferences. It is highly recommended to consult with us at Afirmo.com – we can provide tailored advice based on your situation.

Afirmo’s Business Set Up Tool takes you through the steps to set up as a Sole Trader, Partnership or LLC. It also asks questions to make sure you choose the structure that is right for you. Find out more here.