The most common business structures in New Zealand

From where to set up shop to which audience to target, you’ll make a lot of decisions when you're starting a business. One of those decisions is which type of business you should run. The good news is that you can start small—you can kick start a solo business in your living room and incorporate it as a company not long after. Before you do that, however, you’ll need to know what each business structure involves. Here are the primary business structures recognised in New Zealand.

Sole trader

The easiest way to start a business is to jump right in. When you operate as a sole trader, you don’t have to register your operations or your business name. Instead, you can be your neighbourhood’s unofficially-designated lawn mower or home cleaner. Sole traders and their businesses are considered the same. This means that your business won’t be a separate entity under the law—you'll fund it entirely and enjoy all the profits yourself. It also means that you'll be solely liable for any losses the business incurs.

You’ll have to inform the Inland Revenue Department when you start operating as a sole trader, and get a personal IRD number so you can lodge your annual returns and pay taxes on your income. If you earn more than $60,000 in revenue per year, or you expect to, you should also register for GST. As a sole trader, you will receive a tax discount on your first year.

If you travel and live overseas for an extended period within a year, you may have to pay taxes in that country as well. This requirement varies by country. For instance, if you live in Australia for at least six months within a year (continuously or otherwise), you’ll have to pay income tax in Australia for those six months.

You can also register for a New Zealand Business Number (NZBN). This will be a unique, publicly accessible number that identifies your business as registered by law. An NZBN is optional for sole traders.

Unlimited partnership

A partnership is a business established by two or more individuals or organisations. When you decide to start a partnership, you have to inform the Inland Revenue Department and register for an NZBN. Usually, you'll also set up a partnership agreement that outlines the exact contributions, roles, and liabilities of each partner. Partnerships should maintain official business records for at least seven years, according to the Inland Revenue Department.

As in the case of a sole trader, a partnership is not considered a separate legal entity. This is why in an unlimited partnership, all partners are completely liable for losses the business incurs. When the business earns a profit, it’s distributed amongst partners based on their share of the partnership. The business itself doesn't pay taxes, but it has to register for an IRD number and file its annual returns to the Inland Revenue Department. If it earns more than $60,000 annually, the partnership business should also register for  GST. All partners should pay income tax individually, based on their share of the business.

When you start a partnership business, each partner will automatically receive Accident Compensation Coverage (ACC) insurance. A government agency, the ACC, provides coverage for all businesses from the first date of operations. Partners don’t have to pay for this insurance until they’ve filed their first year of tax returns since starting the partnership. How much each partner pays depends on their involvement and their everyday role in the business.

As with sole traders, if individual partners travel and live overseas for extended periods within a year, they may have to pay taxes in that country as well.

Limited partnerships: This is a less common partnership structure in New Zealand. It's quite similar to unlimited partnerships, except that in a limited partnership, a partner’s legal liability is limited to their share, providing some protection for their personal assets.

Company

A company is considered a separate legal entity, which means it can be liable for losses, can sue other businesses or individuals, and can be sued by others. Because it limits owner and co-founder liability, It's a popular choice for many business owners that have outgrown the sole trader stage.

The company should be registered with the Companies Office and pay registration fees. As a separate entity, it should file annual returns with the Companies Offices and pay its tax returns to the Inland Revenue Department. It should also have a separate IRD number.

A company should have stakeholders—those who hold shares in the company. Most companies are limited companies, which means that if the company incurs a loss, shareholders are only liable up to the value of the shares they hold. When the company makes a profit, each stakeholder will earn a dividend based on their share in the company. They will then include that income in their individual income tax. For daily operations and decision making, the shareholders should nominate a board of directors.

A company can be privately held, publicly listed on a stock exchange, or funded by venture capitalists.

Unlimited company: This is a less common business structure, where the liability of shareholders isn't limited to the value of their shares. How much they are liable for is defined in the company's constitution. Unlimited companies are set up for specific legal requirements, often to meet overseas regulations.

Parting thoughts

Based on your type of business or organisation, there are other structure options, such as co-operatives, trusts and charitable trusts, incorporated societies, credit unions, and societies. It’s best to choose a structure that you know you can maintain for a few years while you establish yourself as a credible business. Too many changes too soon can disrupt operations and confuse your audience. We recommend speaking to fellow business leaders to understand the practicalities of each structure. You can also go through this guided questionnaire to help you choose the business structure that’s best aligned with your needs.

Regardless of the structure you choose, you can employ staff. To do so, you first have to register as an employer with the Inland Revenue Department and comply with its pay and workplace regulations. Based on your industry and the type of business you want to run, it’s also worth thinking about protecting your intellectual property (IP). This includes your logo, copyrights, and trademarks. Have a look at this handy 10-step guide to starting a business that the Ministry of Business, Innovation & Employment has put together.