{"id":1298,"date":"2022-12-05T12:25:21","date_gmt":"2022-12-04T23:25:21","guid":{"rendered":"https:\/\/marketingwebsite.afirmo.com\/nz\/?p=1298"},"modified":"2024-04-23T16:40:48","modified_gmt":"2024-04-23T04:40:48","slug":"choosing-a-business-structure-for-your-small-business","status":"publish","type":"post","link":"https:\/\/www.afirmo.com\/nz\/resources\/choosing-a-business-structure-for-your-small-business\/","title":{"rendered":"Choosing a Business Structure for your Small Business"},"content":{"rendered":"<p>All of these business structures must pay tax, are able to export goods and services overseas, and can take on employees or contractors. <span style=\"font-weight: 400;\">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.\u00a0<\/span><\/p>\n<h2><b>Sole trader business structure<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Many people who are self-employed, contracting or starting a small business begin as a sole trader. It\u2019s 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.\u00a0<\/span><\/p>\n<div class=\"ebook-banner-link\">\n\t<a href=\"#download-ebook\" class=\"fusion-button button-default button-large\">Download the Small Business Guide to Tax<\/a>\n<\/div>\n<p><b>Benefits of being a sole trader<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You can just start &#8211; there\u2019s no legal entity to put in place or pay for, because you are the \u2018sole trader\u2019 and you almost certainly already have an IRD number unless you have moved to New Zealand recently\u00a0\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You have full control<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">All profits go to you<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">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\u00a0\u00a0<\/span><\/li>\n<\/ul>\n<p><b>Downsides of being a sole trader<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You\u2019re responsible for all business debts, so you could lose personal possessions if you don\u2019t pay what you owe. You have no limited liability (but can consider insurance for some risks)<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It\u2019s harder to sell a sole trader business, because legally it\u2019s just you<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">If you employ your spouse the IRD will need to approve their employment terms\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Getting finance or attracting investors can be more difficult, which can limit business growth<\/span><\/li>\n<\/ul>\n<p><b>Tax as a sole trader<\/b><\/p>\n<p><span style=\"font-weight: 400;\">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.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">At the end of each financial year, you file a tax return as an individual with Inland Revenue \u00a0 \u00a0 . 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you\u2019re 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.\u00a0 At the same time, you can claim back the GST you have paid on expenses related to your sole trader business.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Although being a sole trader is relatively straightforward, it still pays to get advice from an accountant or business advisor to check if it&#8217;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\u2019re in another country for a good part of the year, you might have to pay tax to that country\u2019s government. Spending more than 183 days within any 12 month period in Australia, even if it\u2019s spread over several trips, makes you an Australian tax resident. Afirmo takes the hassle out of these pain points for you.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For more information see our guide to <\/span><a href=\"https:\/\/www.afirmo.com\/nz\/sole-trader-nz\/\"><span style=\"font-weight: 400;\">setting up as a sole trader in New Zealand.<\/span><\/a><\/p>\n<div class=\"ebook-banner-link\">\n\t<a href=\"#download-ebook\" class=\"fusion-button button-default button-large\">Download the Small Business Guide to Tax<\/a>\n<\/div>\n<h2><b>Company business structure<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">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.\u00a0\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Shareholders are responsible for the company\u2019s debts up to the value of each person\u2019s 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\u2019s profits in the form of a dividend as well as choosing other ways to be paid by the company.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Operating your business as a company is more complex than the other options and can add to administration time and costs. It\u2019s 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.\u00a0\u00a0<\/span><\/p>\n<p><b>Benefits of operating as a company<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Companies pay corporation tax at a lower rate than the top personal income tax rates<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Each shareholder\u2019s financial responsibility is limited to how much unpaid share capital they have<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A company is often seen to have a higher standing than a sole trader<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It\u2019s easier to borrow money or attract investors<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A company\u2019s growth is not limited by being anchored to one person (as you can appoint multiple directors and shareholders)\u00a0<\/span><\/li>\n<\/ul>\n<p><b>Downsides of operating as a company<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Companies have to manage greater regulatory compliance<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Company directors have legal responsibilities\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Company director and shareholder details are publicly available<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You have to file tax returns for the company, as well as your individual income tax return\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You have to file an annual return with the Companies Office to confirm the public details are still valid\u00a0<\/span><\/li>\n<\/ul>\n<p><b>Tax as a company<\/b><\/p>\n<p><span style=\"font-weight: 400;\">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.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If the company doesn\u2019t make a profit, it usually doesn\u2019t 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\u2019re 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.\u00a0 At the same time, the company can claim back the GST paid on business-related expenses.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">When you work for your own company, you can choose to be either:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">a non-PAYE tax paying shareholder employee, or<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">an employee of the company on a regular salary with PAYE tax deductions<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The choice you make will affect your KiwiSaver contribution arrangements and how you pay ACC levies, which we discuss in a later chapter.\u00a0 It\u2019s important to get professional advice to help you choose the best option for your current situation and future goals.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For more information see our guide to <\/span><a href=\"https:\/\/www.afirmo.com\/nz\/company-registration\/\"><span style=\"font-weight: 400;\">registering a company in New Zealand<\/span><\/a><span style=\"font-weight: 400;\">.\u00a0<\/span><\/p>\n<h2><b>Partnership business structure<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">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.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It\u2019s a structure that typically works well for groups of farmers, lawyers, architects, dentists, accountants, public relations specialists and other professionals.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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\u2019t 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.\u00a0<\/span><\/p>\n<p><b>Benefits of operating as a business partnership<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Partners can invest money into the business, either by \u2018buying in\u2019 or, at any later stage, by mutual agreement<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">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<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Partners can bring different strengths and experience to leading and managing the business<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The work and responsibility involved in running the business can be shared by the partners, so it doesn\u2019t rest on one person\u2019s shoulders<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">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\u00a0\u00a0<\/span><\/li>\n<\/ul>\n<p><b>Downsides of operating as a business partnership<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Each partner is personally responsible for all partnership debts, which puts their personal possessions at risk if debts can\u2019t be repaid<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">If any partners can\u2019t pay their share of the business debts, then the other partners are legally required to pay it for them<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">It is possible to be a \u2018limited partner\u2019, 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.<\/span><\/p>\n<p><b>Tax as a business partnership<\/b><\/p>\n<p><span style=\"font-weight: 400;\">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\u2019t pay tax, but still has to file an IR7 partnership tax return with Inland Revenue at the end of the financial year.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">As a partner, you pay ACC levies based on your income from the partnership, unless you\u2019re a partner who has no active role in the day-to-day operation or administration of the partnership, such as an investor-only partner.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<div class=\"ebook-banner-link\">\n\t<a href=\"#download-ebook\" class=\"fusion-button button-default button-large\">Download the Small Business Guide to Tax<\/a>\n<\/div>\n<h2><b>Articles in the Small Business Guide to Tax series\u00a0<\/b><\/h2>\n<ul>\n<li><a href=\"https:\/\/marketingwebsite.afirmo.com\/nz\/resources\/a-small-business-guide-to-tax\/\"><span style=\"font-weight: 400;\">A small business owner\u2019s introduction to tax<\/span><\/a><\/li>\n<li><a href=\"https:\/\/marketingwebsite.afirmo.com\/nz\/resources\/choosing-a-business-structure-for-your-small-business\/\"><span style=\"font-weight: 400;\">Choosing a business structure<\/span><\/a><\/li>\n<li><a href=\"https:\/\/marketingwebsite.afirmo.com\/nz\/resources\/what-are-the-main-small-business-taxes-and-levies\/\"><span style=\"font-weight: 400;\">The <\/span><span style=\"font-weight: 400;\">main small business taxes and levies<\/span><\/a><\/li>\n<li><a href=\"https:\/\/marketingwebsite.afirmo.com\/nz\/resources\/maintaining-business-records-for-tax-purposes\/\"><span style=\"font-weight: 400;\">Maintaining business records for tax purposes<\/span><\/a><\/li>\n<li><a href=\"https:\/\/marketingwebsite.afirmo.com\/nz\/resources\/tax-registration-requirements-for-small-businesses\/\"><span style=\"font-weight: 400;\">Small Business tax registration requirements<\/span><\/a><\/li>\n<li><a href=\"https:\/\/marketingwebsite.afirmo.com\/nz\/resources\/a-deep-dive-into-tax-types\/\"><span style=\"font-weight: 400;\">Small Business Tax types in more detail<\/span><\/a><\/li>\n<li><a href=\"https:\/\/marketingwebsite.afirmo.com\/nz\/resources\/tax-payment-due-dates\/\"><span style=\"font-weight: 400;\">Tax payment due dates<\/span><\/a><\/li>\n<li><a href=\"https:\/\/marketingwebsite.afirmo.com\/nz\/resources\/tax-forms-and-when-to-file-them\/\"><span style=\"font-weight: 400;\">Tax forms and when to file them<\/span><\/a><\/li>\n<li><a href=\"https:\/\/marketingwebsite.afirmo.com\/nz\/resources\/how-to-get-money-out-of-your-company\/\"><span style=\"font-weight: 400;\">How to get money out of your company<\/span><\/a><\/li>\n<\/ul>\n<div class=\"ebook-banner-link\">\n\t<a href=\"#download-ebook\" class=\"fusion-button button-default button-large\">Download the Small Business Guide to Tax<\/a>\n<\/div>\n<p>&nbsp;<\/p>\n<p>&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8212;&#8211;<\/p>\n<h4><b>Afirmo Disclaimers:<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Afirmo is here to make it easier and quicker for small businesses to understand and comply with government and other regulations and obligations and get on with their businesses and succeed.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">We do this by packaging information and advice from across many sources including government websites into tools and resources, designed with small businesses in mind.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">To make our resources as easy to understand as possible and to avoid overwhelming our audience, we aim to provide enough detail to help in the majority of situations, rather than comprehensive detail for all situations.\u00a0<\/span><\/p>\n<p><b>Tax Series Disclaimer:<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The information available in this series of Tax articles includes information provided by the Ministry of Business, Innovation and Employment (MBIE) and information provided by third parties (providers of information). This information is intended to provide general business information to the public. The information in this series should not be your only source of business information. We recommend you seek professional advice as appropriate.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Afirmo endeavours to ensure that the information in this book is reliable and accurate at the time of publishing, however:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Neither Afirmo, nor any of its employees, contractors, and providers of information, make any express or implied representations or warranties regarding the material and facilities contained or referred to in this series of Tax articles;<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Afirmo, its employees, contractors and providers of information, do not accept any liability, for any reason whatever, for any loss or damage which may arise in any way<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">\u00a0 \u00a0<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0<span style=\"font-weight: 400;\">(a) out of the use of any of that material or facilities; or<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u00a0 \u00a0<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0<span style=\"font-weight: 400;\">(b) from errors in or omissions from that material or facilities; or<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 <\/span><span style=\"font-weight: 400;\">(c) from inaccuracy of any information obtained through use of this site.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Afirmo is not responsible for the content of other websites linked to, or referenced. The inclusion of, or reference to any link to another website, or reference to any specific commercial product, process, or service, whether by trade name, trade mark, manufacture, or otherwise, does not constitute an endorsement, verification or recommendation by this book, MBIE or the New Zealand Government.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Afirmo may change, delete, add to, or otherwise amend information contained on this website without notice.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The contents of this series of Tax articles should not be construed as legal or professional advice.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Each article in this series must be read in conjunction with this disclaimer and any other disclaimer that forms part of it.<\/span><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>All of these business structures must pay tax, are able<\/p>\n","protected":false},"author":3,"featured_media":1906,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"content-type":"","footnotes":""},"categories":[6],"tags":[32],"class_list":["post-1298","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-starting-a-business","tag-business-formation-service"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.1.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Choosing a Business Structure for your Small Business | Afirmo NZ<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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