Is a Company the right business structure for you?
Choosing the correct business structure when you start out in business is very important for a number of reasons – not least that the wrong business structure may be costly to change later on.
Often people assume that they need to form a company to start up in business – but while forming a company is a valid business structure choice, it’s not always the best option.
The IRD suggest you get advice from an accountant, lawyer or business advisor before you make a final decision, and having seen scenarios where this hasn’t been done, we agree!
Sole Trader
A sole trader goes into business and trades on their own. This means they are personally responsible for taxes and debts, use their own IRD number for the business, but can still trade under a trade name, employ staff and register for GST. It’s important to seek advice about whether you need to register for GST.
Partnerships
A partnership is where two or more people join together to run a business and share profits and losses (equally, or as otherwise agreed). Partners are personally responsible for debt, and can trade under a trade name, employ staff and register for GST. Again, do seek advice about whether you need to register for GST.
Companies
A company is a legal entity, separate from the shareholders that own the company. A company has a greater number of compliance responsibilities than a sole trader or partnership. Companies not only have compliance responsibilities with Inland Revenue, but also the Companies Office, and a company must apply for a company name and an IRD number. The shareholders liability for losses is limited to the amount of their shareholding in the company. A company can register as an employer and for GST, but should take professional advice on whether they need to register for GST.
Look-through companies (LTC)
Look-through companies owners need to elect for their company to be an LTC, then the registered companies will have the same obligations and benefits as ordinary companies. LTC profits or losses are “looked through” for income tax, which means that the owners are treated as having received the income and incurred the loss of the company. For income tax purposes, assets are considered to be owned by the shareholders.
Business Structures – an IRD explanation
More information about companies can be found at:
