Starting a business in New Zealand involves many decisions, and one of the most critical is choosing the right business structure. The structure you choose affects your legal obligations, taxation, and the amount of control you have over your business.

Here’s a breakdown of the four main business structures in New Zealand—sole trader, partnership, company, and trust—including the benefits and disadvantages of each to help you make an informed decision.

Sole Trader

A sole trader is the simplest business structure in New Zealand. As a sole trader, you own and operate the business by yourself, with no legal distinction between you and your business.

Advantages:

• Ease of Setup and Low Cost: Registering as a sole trader is quick, simple, and inexpensive. There’s no need for formal legal agreements or significant initial expenses.
• Complete Control: As the sole owner, you make all business decisions, allowing you to run the business exactly as you see fit.
• Tax Simplicity: Profits are taxed at your personal income tax rate, and there’s no need to file a separate tax return for the business.

Disadvantages:

• Unlimited Liability: Sole traders have personal liability for business debts, putting personal assets at risk if the business encounters financial trouble
• Limited Growth Potential: This structure may limit growth as it can be harder to access large loans or investors.
• Reliance on One Individual: The business heavily relies on the sole trader, which can lead to challenges if you become unable to work.

Partnership

A partnership involves two or more people or entities operating a business together, typically governed by a partnership agreement. Each partner contributes to the business, whether through skills, capital, or property, and shares in profits and losses.

Advantages:

• Combined Resources: Partnerships allow partners to pool their skills, knowledge, and capital, which can increase the business’s strength and reach.
• Shared Responsibility: Partners share the responsibility of decision-making and management, which can reduce the pressure on any one individual.
• Tax Efficiency: Like sole traders, partnerships don’t pay tax at the business level. Instead, profits are split between partners and taxed at each partner’s personal tax rate.

Disadvantages:

• Unlimited Liability: In a standard partnership, each partner is personally liable for business debts, which means one partner can be held accountable for the entire business debt.
• Potential for Disputes: Conflicts can arise between partners over decision-making and profit-sharing, which makes having a detailed partnership agreement essential.
• Difficulty in Exiting: Partnerships can be challenging to dissolve or exit, as leaving a partnership often requires either selling your share or the consent of other partners.

Company

A company is a separate legal entity from its shareholders, offering limited liability. Companies in New Zealand can be private or public, with most small businesses opting for a private company structure.

Benefits:

• Limited Liability: Shareholders are generally only liable for the company’s debts up to the amount of their investment, which protects personal assets.
• Growth Potential: Companies can raise capital by selling shares and are often more attractive to investors due to their limited liability structure.
• Separate Legal Entity: As a separate entity, a company can enter contracts, own property, and incur liabilities independently from its shareholders.

Disadvantages:

• Complexity and Cost: Setting up and running a company is more complex and expensive than a sole trader or partnership. You need to register with the Companies Office and comply with ongoing legal requirements.
• Additional Tax Obligations: Companies are taxed separately from shareholders and are subject to a 28% corporate tax rate, and shareholders pay tax on dividends received.
• Regulatory Requirements: Companies must comply with various legal and financial reporting standards, which can be time-consuming and costly to maintain.

Trust

A trust is a structure where trustees manage assets for the benefit of beneficiaries. Family trusts and business trusts are common in New Zealand for asset protection and succession planning.

Benefits:

• Asset Protection: Trusts offer a high level of asset protection, as assets owned by the trust are not considered personal property and may be shielded from creditors.
• Succession Planning: Trusts allow for smooth succession planning by specifying beneficiaries, making it easier to transfer ownership without complex probate processes.
• Potential Tax Benefits: Income earned by the trust can be distributed to beneficiaries, potentially reducing the overall tax burden, as income is taxed at the beneficiary’s tax rate.

Disadvantages:

• Complex and Costly to Set Up: Setting up a trust requires legal expertise and can be expensive, as you need to create a formal trust deed and appoint trustees.
• Limited Control: Once assets are transferred to a trust, the settlor (creator) gives up ownership, and trustees must act in the best interest of the beneficiaries, which may limit the original owner’s control.
• Ongoing Compliance Requirements: Trusts require careful administration and must comply with legal obligations to ensure they’re maintained correctly and tax obligations are met.

Choosing the Right Business Structure in NZ

Each business structure has its own benefits and challenges, so aligning your choice with your business goals, level of control, financial needs, and risk tolerance is key.

For guidance in determining the best business structure, consulting with a chartered accountant can make all the difference. Get in touch with ABA and learn how we can guide and support you.

ABA Chartered Accountants offers a comprehensive range of business services to meet any need—from expert accounting and taxation services to support with budgets and cashflows, right through to detailed management and business reporting we can help to keep your business thriving.