All of these business structures must pay tax, are able to export goods and services overseas, and can take on employees or contractors. To help you get started, here are some of the main pros, cons and taxation differences for each main type. There are other considerations but good to understand the basics. 

Sole trader business structure

Many people who are self-employed, contracting or starting a small business begin as a sole trader. It’s the easiest way to get set up and the simplest to operate. Later on, if a company or partnership structure would suit your business better, you can always change. This does however involve time and cost so getting it right upfront is obviously better. 

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Benefits of being a sole trader

  • You can just start – there’s no legal entity to put in place or pay for, because you are the ‘sole trader’ and you almost certainly already have an IRD number unless you have moved to New Zealand recently  
  • You have full control
  • All profits go to you
  • If you make a loss, it can be deducted from other income you might earn before calculating your tax to pay. Other structures can allow this also but normally involves some more forms to fill in  

Downsides of being a sole trader

  • You’re responsible for all business debts, so you could lose personal possessions if you don’t pay what you owe. You have no limited liability (but can consider insurance for some risks)
  • It’s harder to sell a sole trader business, because legally it’s just you
  • If you employ your spouse the IRD will need to approve their employment terms 
  • Getting finance or attracting investors can be more difficult, which can limit business growth

Tax as a sole trader

As a sole trader you pay tax on all the income you earn. You can subtract the cost of sole trading work-related expenses from your total income to reduce the tax you pay, like other business structures. 

At the end of each financial year, you file a tax return as an individual with Inland Revenue     . Your tax return will also include income from all other sources and any tax already paid during the year. Other income sources could include part-time or full-time paid employment, other contracting work, interest earned on savings and investments, any rental income and others.

If you’re registered for GST (see below) you have to add GST to what you charge customers and pass it on to Inland Revenue at regular times during the year.  At the same time, you can claim back the GST you have paid on expenses related to your sole trader business. 

As a sole trader you have to pay ACC levies, which we discuss in a later chapter. [hyperlink to ACC levies chapter] You can choose to join a KiwiSaver scheme and make your own contributions, or continue contributing to a scheme you already belong to. If you also earn a salary or wages, your employer will still have to take deductions from what they pay you.

Although being a sole trader is relatively straightforward, it still pays to get advice from an accountant or business advisor to check if it’s the best structure for you. The Afirmo app also has a business selection tool to help you make this decision. For example, if you’re in another country for a good part of the year, you might have to pay tax to that country’s government. Spending more than 183 days within any 12 month period in Australia, even if it’s spread over several trips, makes you an Australian tax resident. Afirmo takes the hassle out of these pain points for you. 

For more information see our guide to setting up as a sole trader in New Zealand.

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Company business structure

A company is a different legal structure to you as an individual. This provides limited liability in the event that the business fails, but also results in more tax admin to consider. People tend to choose a company when the desire for protection against failure is more important than the hassle of increased tax admin.   

A company has directors and shareholders, but you can be the only one if that suits. Directors run the company and shareholders own the company. 

Shareholders are responsible for the company’s debts up to the value of each person’s unpaid shares. You can however choose to offer $1 as share capital. There are no minimum limits. Shareholders can also receive an agreed share of the company’s profits in the form of a dividend as well as choosing other ways to be paid by the company. 

Operating your business as a company is more complex than the other options and can add to administration time and costs. It’s important to get trusted professional advice about the legal and financial requirements before you decide to register a company. Ultimately all companies are registered with the New Zealand Companies Office. Afirmo is a registered partner of MBIE (Ministry of Business Innovation and Employment) which runs the Companies Office so we can incorporate the company on your behalf also if that helps.  

Benefits of operating as a company

  • Companies pay corporation tax at a lower rate than the top personal income tax rates
  • Each shareholder’s financial responsibility is limited to how much unpaid share capital they have
  • A company is often seen to have a higher standing than a sole trader
  • It’s easier to borrow money or attract investors
  • A company’s growth is not limited by being anchored to one person (as you can appoint multiple directors and shareholders) 

Downsides of operating as a company

  • Companies have to manage greater regulatory compliance
  • Company directors have legal responsibilities 
  • Company director and shareholder details are publicly available
  • You have to file tax returns for the company, as well as your individual income tax return 
  • You have to file an annual return with the Companies Office to confirm the public details are still valid 

Tax as a company

Companies pay a single rate of tax on their income after business-related expenses have been subtracted from it. If the company decides to pay a dividend from this profit to its shareholders, then the company pays a slightly higher percentage of tax. The shareholders may have to pay additional tax or claim a refund depending on what their total taxable income is in a tax year.  

If the company doesn’t make a profit, it usually doesn’t have to pay tax. However, any loss made by your company cannot be subtracted from your personal income for tax purposes, like it can when you’re a sole trader, unless you decide to elect the company to be a Look Through Company (LTC), in which case you can get the losses offset against your personal income as well as enjoy the limited liability of being a company.

If your company is registered for GST (see below) it has to add GST to what it charges customers and pass it on to Inland Revenue at regular times during the year.  At the same time, the company can claim back the GST paid on business-related expenses.

When you work for your own company, you can choose to be either:

  • a non-PAYE tax paying shareholder employee, or
  • an employee of the company on a regular salary with PAYE tax deductions

The choice you make will affect your KiwiSaver contribution arrangements and how you pay ACC levies, which we discuss in a later chapter.  It’s important to get professional advice to help you choose the best option for your current situation and future goals. 

For more information see our guide to registering a company in New Zealand. 

Partnership business structure

A group of people or other entities can choose to form a business as a partnership. The way they share the work, debts and income is documented in a partnership agreement, along with things like how disputes will be resolved and what happens if a partner wants to leave. 

It’s a structure that typically works well for groups of farmers, lawyers, architects, dentists, accountants, public relations specialists and other professionals. 

In many ways, a partnership sits between the sole trader and company business structures. The partners retain a good degree of individual standing, while also forming a recognisable entity that doesn’t rely on one particular person for its existence. In some cases the partnership can limit its liability through being a limited partnership. This section deals with non-limited liability partnerships as intended to be an introduction to the business structure. 

Benefits of operating as a business partnership

  • Partners can invest money into the business, either by ‘buying in’ or, at any later stage, by mutual agreement
  • If the partnership makes a loss, each partner can subtract their share of the loss from their other income before calculating their individual tax to pay
  • Partners can bring different strengths and experience to leading and managing the business
  • The work and responsibility involved in running the business can be shared by the partners, so it doesn’t rest on one person’s shoulders
  • It can be easier to borrow money as a partnership, compared to a sole trader as more people are involved and therefore more capital can be pledged as security  

Downsides of operating as a business partnership

  • Each partner is personally responsible for all partnership debts, which puts their personal possessions at risk if debts can’t be repaid
  • If any partners can’t pay their share of the business debts, then the other partners are legally required to pay it for them

It is possible to be a ‘limited partner’, such as an investor, in which case your responsibility for debt is limited to the amount you invested in the partnership. If the partnership does make a loss, being a limited partner also affects how you calculate your personal tax offsetting share of that loss.

Tax as a business partnership

All of the profit from a partnership is shared among the partners according to the partnership agreement. Each partner then pays individual income tax on their share of the profit, plus their income from all other sources. The partnership itself generally doesn’t pay tax, but still has to file an IR7 partnership tax return with Inland Revenue at the end of the financial year.

As a partner, you pay ACC levies based on your income from the partnership, unless you’re a partner who has no active role in the day-to-day operation or administration of the partnership, such as an investor-only partner.

Partners can make their own KiwiSaver contributions directly to a scheme provider, unless the partnership pays them a salary or wage with PAYE tax deducted. In that case, the partnership is responsible for deducting and managing the KiwiSaver contributions as an employer would.

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Articles in the Small Business Guide to Tax series 

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