Sole traders, partnerships, and companies form the backbone of New Zealand’s economy. While those are the most common business structures in the country, there are also a whole bunch of other, highly-specialised business structures in operation. If you’re thinking about formalising your slightly-non-traditional business idea, one of these structures might be a good fit.
A co-operative is owned and operated by volunteers, and led by a board of directors elected from and by its members. A co-operative’s sole purpose is to serve its members and its society. Members can get limited benefits and rewards from the revenue made by the co-operative, while the rest is reinvested towards its operations. All members have limited liability for any losses the co-operative incurs.
Other business structures, such as companies, can also become co-operatives. In these instances, the business should be incorporated under both the Companies Act of 1993 and the Co-operative Companies Act of 1996. The latter gives the company the right to use “co-operative” in its name. A co-operative company should have a constitution outlining its activities, which must be filed with the publicly-accessible Companies Register. In a co-operative company, at least 60% of the voting rights should be collectively held by active members.
A co-operative that’s not a company can also be registered under other legislations, such as the Friendly Societies and Credit Unions Act or the Charities Act of 2005. Every legislation that a co-operative wishes to register under will have its own requirements related to minimum number of members and their rights, and obligations of the organisation.
Co-operatives can be further categorised based on their function, such as producer co-ops, purchasing co-ops, financial co-ops, insurance co-ops, and consumer co-ops. Organic Dairy Hub, Marlborough Wine Growers, SBS Bank, Nelson Building Society, and Mitre 10 are all well-known co-operatives in New Zealand.
Charities and charitable trusts
Not-for-profit organisations and charities should be registered under the Charities Act of 2005, and trusts should be registered under the Trusts Act of 2019.
Charities should incorporate a board of directors, which will be considered a separate legal entity from its members. The board can operate as an individual: It can buy and sell assets, enter into contracts, and participate in legal action. Most charities are exempt from paying taxes, but for this exemption to be applicable, a charity must be registered with the Charities Register. A charity should have its own IRD number and report its revenues to the Inland Revenue Department. Once the Inland Revenue Department recognises a charity as a not-for-profit, all donations made to the charity will become tax exempt. As is the case with any incorporated organisation, a charity should keep business and operational records for at least seven years.
A charity can make profits during the normal course of operation, but profits can't be distributed amongst members. A charity can also employ paid and volunteer staff, but to do so, it should first register with the Inland Revenue Department as an employer. If you’re considering starting a charity or working with one, have a look at this best practice guide from Volunteering New Zealand.
Charities not registered: A charity or a not-for-profit organisation can also choose to be an unincorporated group or trust. There is no specific public register for these organisations, and they are not considered separate legal entities by law.
An incorporated society should be registered under the Incorporated Societies Act of 1908. It is considered a separate legal entity, and can own and rent assets and enter legal contracts. It’s owned and run by members, but members have limited liability for losses, and have no right or control over the society’s assets.
Incorporated societies are designed to be long-term. They can go on for generations after they've been founded. Therefore, an incorporated society should follow operational requirements of the Societies Act of 1908 and maintain a written record of the society’s governing rules.
To form an incorporated society, you’ll need at least 15 members—either individuals or bodies corporate. Each body corporate that wishes to join an incorporated society will count as the equivalent of three individuals. Incorporated societies can raise funds to achieve their goals (or “objects,” as stated in the Act), but these funds can’t be distributed amongst members. Members can jointly conduct for-profit activities such as fund raising events, stalls, and raffles. However, they should first acquire licenses from the local government authorities to conduct such activities.
Incorporated societies can be charities and registered under the Charities Act of 2005. They may be exempt from paying taxes pending the Inland Revenue Department's approval. As with any business, incorporated societies can also employ people, but should first be registered as an employer with the Inland Revenue Department.
Societies not incorporated: A society can choose not to incorporate. In that case, members will be held personally liable for the society’s activities. The society will not be recognised as a separate legal entity, and cannot own assets or enter contracts. It will not need to create a written document outlining the rules of the society.
These are member-owned and operated, co-operative-style financial organisations. Incorporated under the Friendly Societies and Credit Unions Act of 1982, a credit union is comprised of members who have something in common, such as the same employer, same city or state of residence, or same religious beliefs. Members invest their savings and receive dividends. Credit unions can also offer loans to members and any other organisations that are closely related to a member.
A credit union is considered a separate entity by law, and can enter into contracts and legal proceedings. Members aren’t liable for the union’s financial affairs. Every financial year, a credit union must appoint an auditor of its financial statements. It should also file an annual return to the Registrar of Friendly Societies and Credit Unions. Credit unions can take part in any industry or business activity, as long as those activities align with the union’s objectives.
Other registered societies
These are different from incorporated societies in that they’re formed by specific groups to cater to specific requirements. They're also registered under their own Act.
This is a member-owned and operated society with a sole purpose of providing financial services to members, including housing loans, insurance, and foreign currency exchanges. A building society should be registered under the Building Societies Act of 1956. Before starting operation, it should also get a certificate of incorporation from the Registrar of Building Societies.
A building society can be formed to serve either long-term or short-term, terminating at a certain point in time or when specific thresholds are met.
These are often small, informal groups formed by volunteer members for the benefit of their immediate society. The purpose of a friendly society is solely to support and care for immediate family members (including current and former partners, step-children, and adopted family members) when:
- They are experiencing physical or mental illness
- They’ve surpassed 50 years of age
- Their partner or spouse has passed away
- The children have been orphaned, whether they’re minors or adults studying full time
A friendly society is registered under the Friendly Societies and Credit Unions Act of 1982, but it is not incorporated. This means that the society is not considered a separate legal entity by law. It can receive donations for its everyday operations.
An industrial society is usually formed by a group of business owners who come together to learn with and from each other. The purpose of the society is mutual benefit. However, the benefit should not be direct profits for members. An industrial society can carry on any business activity in any industry, except banking.
To set up an industrial society, you’ll need a minimum of seven members and a secretary. The society should be incorporated under the Industrial and Provident Societies Act of 1908, and should also apply to the Registrar of Industrial and Provident Societies before commencing operations. Once incorporated, an industrial society is considered a separate legal entity, and can therefore own assets, enter contracts, and become legally liable. Members are not liable for the society’s activities or financial undertakings.
Industrial societies should distribute shares amongst members. To ensure fairness for all members, each person can only hold shares with a maximum value of $4,000. This threshold is specified in legislation and only the Minister of Commerce can propose increasing it.
Industrial societies are designed for long-term operation, and if a member dies and their share value is less than $1,000, the society can transfer the shares to another person without probate. Members can nominate another member to inherit their shares, and if they haven’t nominated anyone, the society has the power to transfer the shares to the next legal recipient.
That's a whole lot of information to take in. For a relatively small nation, New Zealand has a lot of community-based organisations serving locals' needs. If you're thinking of starting a business or a community organisation, you have a large pool of options to choose from. We recommend talking to other business owners and legal consultants to understand the fine print involved in each organisation structure.
Have a look at this questionnaire that The Ministry of Business, Innovation & Employment has put together. It'll help you identify the structure that works best for the business you're planning.