This is one of the first decisions you face when you start a business in New Zealand, and it is one a lot of people overthink. The good news is that for most people starting out, the answer is straightforward.
Key takeaways
- A sole trader is the simplest and cheapest way to start a business in New Zealand. Income is taxed at personal rates.
- A company is a separate legal entity that protects your personal assets if the business runs into trouble. Profits are taxed at a flat 28%.
- For owners who draw most of the profit out, total tax paid is often similar between the two structures because money taken out is taxed at personal rates.
- Companies require more compliance: annual accounts, a Companies Office annual return, and usually an accountant.
- You can start as a sole trader and restructure to a company as the business grows. Many people do.
Here is a plain-English breakdown of the differences, the trade-offs, and how to pick what fits.
What is the difference between a sole trader and a company?
A sole trader is just you, operating under your own name or a trading name. There is no registration required beyond telling IRD you are self-employed. You use your personal IRD number. Your business income is your personal income. It is the simplest and cheapest way to start.
A company (specifically, a limited liability company) is a separate legal entity. You register it with the Companies Office, it gets its own IRD number, and it is treated as a distinct legal person. The company owns the business, earns the income, and is responsible for its own debts.
Why does liability matter so much?
As a sole trader, there is no separation between you and the business. If the business owes money or faces legal action, your personal assets are at risk. Your house, savings, and car are all on the table.
A company creates a legal wall (known as the corporate veil) between the business and your personal assets. If the company gets into financial trouble, your personal assets are generally protected. That protection is the main reason people choose a company structure.
The protection is not absolute. Personal guarantees on loans or supplier accounts can pierce the corporate veil, and directors can still be personally liable for some breaches. But for most operating risks (a contract dispute, a customer claim, an unexpected debt), the company structure does what it says.
How are sole traders and companies taxed differently?
Sole traders pay personal income tax rates on their business profit. The current brackets are 10.5% up to $15,600, 17.5% up to $53,500, 30% up to $78,100, 33% up to $180,000, and 39% above $180,000. Companies pay a flat 28% tax rate on their profits.
At first glance, 28% sounds better than 33% or 39%. But it is not that simple. When you take money out of a company (whether as a shareholder salary or dividends), that money gets taxed at personal rates.
For many small businesses where the owner takes most of the profit out, the total tax paid can end up similar either way. The company structure has tax advantages when you reinvest profits back into the business rather than drawing them all out, or when your income is high enough that the timing of when you pay tax matters for cash flow.
How much more compliance is involved with a company?
Sole traders have less compliance overhead. You file an IR3 return each year, keep your records, and that is about it.
A company requires more.
- Annual financial accounts.
- A Companies Office annual return (around $57 GST-inclusive at time of writing).
- An IR4 company tax return.
- Potentially separate shareholder tax returns if you draw a salary.
- More complex GST and PAYE filings if you employ staff.
Most company owners need an accountant, which adds to costs. Budget around $1,500 to $3,000 a year for accountant fees on a simple company structure, more if your situation is complex.
When does a company structure actually make sense?
- You are taking on significant financial risk through contracts, staff, or debt.
- You plan to bring on business partners or investors.
- Your industry expects or requires it. Some clients will only contract with companies.
- You want to sell the business in the future. Selling a company is cleaner than selling sole trader assets.
- Your profit is high enough that tax planning through a company structure makes a meaningful difference.
- You aren’t the only person running the business, a company is a better structure for a business that has more than one key person.
When does staying a sole trader make sense?
- You are just starting out and want to keep things simple.
- Your financial risk is low. No employees, no major contracts, no significant debt.
- You are a freelancer, consultant, contractor, or trades worker operating solo.
- You want to minimise compliance costs and admin.
- You only intend to operate in business for the short-term.
A sole trader who turns over $80,000 a year on freelance work, has no employees, and uses their own personal car and home office is unlikely to gain anything from the company structure. The compliance cost outweighs the protection in most low-risk scenarios.
Can I switch from sole trader to company later?
Yes. Many people start as a sole trader and move to a company as the business grows. It involves registering a company, potentially transferring assets, and updating your IRD and GST registrations. It is a process, but it is common and manageable.
The important thing is not to overcomplicate the decision at the start. If you are unsure, start as a sole trader. You can always restructure later when the business demands it. Trying to predict whether you will need company structure in three years is rarely worth the immediate compliance cost of starting one now.
What about look-through companies and trusts?
There are other structures (look-through companies, trusts, partnerships, limited partnerships), but for most small business owners starting out, the choice is sole trader or limited company. The other structures generally only become relevant when there is a specific reason: family income splitting, asset protection beyond what a company offers, or estate planning. If someone suggests one of these, ask why and whether the simpler option would do the same job.
Frequently asked questions
How much does it cost to set up a company in NZ?
The Companies Office incorporation fee is around $137 GST-inclusive at the time of writing. Applying for an IRD number is free, and the IRD number can be requested as part of the incorporation process. If you use a setup service, expect to pay between $500 – $2,000 for an end-to-end registration including standard constitution and shareholder agreements. Check the Companies Office website for the current published fee.
Do I need to register for GST as a sole trader or company?
GST registration depends on turnover, not structure. If your business turnover crosses $60,000 in any rolling 12-month period, you must register, regardless of whether you trade as a sole trader or a company.
Can I employ myself in my own company?
Yes. You can pay yourself a salary, take drawings, or pay yourself dividends. Each option has different tax implications. Salary is the simplest and most common, especially for owner-operators who want regular income through PAYE.
Will a company protect me from all personal liability?
No. The company protects you from most operating debts, but personal guarantees on loans or supplier accounts override that protection. Directors can also be personally liable for serious breaches like trading while insolvent or failing to deduct PAYE. The protection is real but not unlimited.
Whether you trade as a sole trader or a company, Afirmo handles the tax calculations, GST returns, and reporting in one place. Start a free trial at afirmo.com.