NZ Business Structures – What is the best business structure for you?

17 November 2022

Starting a business is an exciting time, but it is important to have your business set up correctly. We are a highly experienced firm and focus on setting up small to medium sized businesses.

These are the three most common types of business structures:

Sole Trader

A sole trader operates a business in their own name and is personally liable for the business. This is suitable for a person who is self-employed or small business owners with a limited number of employees and low risk activity.

Partnerships

A partnership is where two or more individuals or entities jointly share the benefits and liabilities in the operation of the businesses. It is encouraged that when you are in a partnership that you have an agreement between the businesses.

Limited Liability Companies

This is the most common and popular type of business structure operated by small to medium businesses in New Zealand. The company is a separate legal entity in its own right and is separate from its directors and shareholders. Any debt sustained by the company will usually not be imposed on the directors or shareholders. It is common for partners to enter into a shareholder agreement or buy-sell agreement, which outlines all their rights and duties as between them.

The Company’s Shareholding

The shares in the Company can be owned by you personally or by your Family Trust. If the company generates any profits, these profits can be paid out to the shareholders.

A shareholder’s salary can be paid out to the shareholder personally, which will be taxed at that person’s relevant tax rate. The company can pay out dividends to the Trust, which will be taxed at 33% (the current rate at the time of writing this article).

The benefit of having the Trust owning shareholdings in the company means that any profits can be paid as dividends to the Trust and then disbursed to the beneficiaries. If any income is disbursed to the beneficiaries, they can offset their expenses against this income.

Obviously, the Trust owning shareholdings in the company can have some significant taxation benefits. However, this cannot be the sole reason for the Trust purchasing shares in the company, as this will be labelled as tax evasion.

You would need a legitimate commercial reason for doing the transfer, such as restructuring, commencing a new business, a joint venture, and so on.

Please note, this article should not be construed or relied upon as legal advice. It is also important to discuss with an accountant which structure is right for you in relation to taxation matters. If you have any questions feel free to call or email our Christchurch business lawyers for further information.

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