Opinion

Choosing the Right Business Structure

Each type of business structure has advantages and disadvantages.  The right business structure for you will depend on your unique circumstances, but getting it wrong could open you and your business up to legal and tax consequences down the line.

The three most common types of business structure are:

1.        Sole trader
2.        Partnership
3.        Company

Sole Trader

This is a common form of business structure in New Zealand because of its simplicity.  If you’re in business on your own, you’re a sole trader.   The only paperwork required relates to registration with the IRD to become an employer (if you have staff) or so you can register the business for GST.

You and the business do not have separate legal identities.   Profits of the business are your profits; debts and liabilities of the business are your debts and liabilities.

Being a sole trader is easy and means you have total control, but be warned, it also means you have unlimited personal liability.

Partnerships

When more than one person decides to work together, you have a partnership.  The terms of the relationship are usually governed by a partnership agreement which will include the terms upon which profits are shared out between the partners.  The benefits of a partnership include sharing of costs and decision making/responsibility, as well as the sharing of ideas.  The downside of a partnership is that you can be personally liable for your other partner’s debts/mistakes etc.

Companies

To form a company you must register your business with the Companies Office and you must have at least one director who lives in New Zealand, or who lives is Australia and is a director of an Australian company.

Unlike a sole trader or a partnership, the Company owns the assets of the business, not the shareholders.  A company is a separate legal entity from its shareholders which means the shareholders have a level of protection against the actions of the company (their liability is restricted to the value of the shares they own).

If you are involved in the everyday running of the Company as a director then you will be liable under the Companies Act 1993 if you breach your duties as a director, for instance if you have acted recklessly, fraudulently or not in the company’s best interests.

Limited liability protection is one of the greatest advantages of setting up a company.  A company also has a lower tax rate.  Companies are more closely regulated than the other forms of business structure however and directors need to fully understand their responsibilities.

The right business structure for you will depend on your circumstances, so make sure you carefully consider your position and seek expert advice to determine which structure is best for you.