Business Structures 101

There are plenty of considerations to be made when starting your own business.

One of those is choosing a structure that would be most appropriate for you to run your business in and for which you will need to consider many factors such as, number of people involved in the business, owner’s liability, tax implications, costs etc.

Here are some structures commonly used by New Zealand businesses to enable you to make the right decision.

Sole Proprietorship

A sole proprietor is an individual carrying out business under his / her own name. There is no distinction made between the business assets and the personal assets of the individual and they are personally liable for all aspects of the business. In New Zealand, there is no system of registering as a sole proprietor making it the simplest and cheapest form of structure.

Partnership

Partnerships are defined under the Partnership Act 1908. A Partnership is formed when several individuals conduct their business together with a view to make a profit. Like sole proprietor, partnerships are not separate legal entities and the partners can be made liable for debts and liabilities of the partnership. Profits of the partnership are equally distributed to the partners and taxed at their personal tax rates.

Company

A company is a separate legal entity governed by the Companies Act 1993 and needs to be registered with Companies Office Registrar. The separation between the company and its owners makes it an ideal vehicle to conduct business in as it limits the liability of the shareholders and directors to the company. This is however, the most expensive and complex structure to setup and maintain. Companies are taxed at a flat rate.

Look Through Company (LTC)

The look through company regime was introduced in April 2011 effectively replacing the loss attributing qualifying companies. LTCs are separately legal entities and transparent for tax purposes. The profits or losses are passed through to the owners and taxed at their marginal tax rates. There are certain requirements for becoming a LTCs and a valid election needs to be made with IRD for gaining this status.

Trust

A Trust can be established by drawing up and executing a trust deed. The trustees of the trust are responsible for running the business on behalf of it’s beneficiaries. The trust is separate for tax purposes and all trust income not distrusted to it’s beneficiaries must be taxed as Trustee income. Trusts currently have a slight higher tax rates than companies.

It is highly important to get the setup correct and we strongly recommend you talk to professional. At Number Munchers we can assist you with all the necessary requirements of setting your business structure so you can focus on what is most important to you, that is running your own business!