Structure

SOLE TRADER, PARTNERSHIP OR COMPANY
A LARGE INFLUENCE IN YOUR DECISION WILL BE YOUR PERSONAL CIRCUMSTANCES.

!f you have no one else who will be taking part in the business with you, then being a sole trader or setting
up as a company could be for you. But if you are intending to be in business with someone, you have the
option of forming a partnership or a company. What is the difference between sole trader, a partnership
and a company?

1. IF YOU OPERATE AS A SOLE TRADER

The business will operate under your name,
The business GST number will be the same as your !RD number,
The net profit of the business will be credited to you,
You will be responsible for the business debts.

2. IF YOU OPERATE AS A PARTNERSHIP:

The business will trade under the partners' names,
!ts GST number will be the same as the partnership's !RD number,
The net profit will be split among the partners,
The partners will normally be jointly and severally liable for the debts of the partnership.

3. IF YOU OPERATE UNDER A COMPANY STRUCTURE:

The business will operate under the company's name (which will have ¨Limited" at the end of the
name),
The company's GST number will be the same as the company's !RD number,
The net profit of the business is the company's profit and it will pay tax on it, unless it is distributed as
directors' fees/shareholder salaries, in which case the directors/shareholders will pay tax on it,
The company is liable for its debts, although office holders and shareholders can be held liable in certain
circumstances.

• SET-UP: We suggest you talk to your accountant and lawyer about which structure would
be best for you before you buy or set up a business.


BELOW IS A CHECKLIST OF (ALL THE} THINGS YOU NEED TO DO (IF YOU'RE RUNNING
A BUSINESS:
Set up a business bank account, Register for GST (if applicable),
Register as an employer (if applicable), Order stationery is necessary,
See an accountant for advise on getting started with record keeping,
See your solicitor (if necessary to sign leases, etc).


1
Options when setting up a business

To determine the most suitable structure you will need to consider a number of factors such as:
• Which structure is right for the type of business you intend to run (eg. some professions can only be sole
traders or partnerships)
• Owner's liability
• Whether the business is new or already established - and a one-off project or on-going
• !nternal structure - eg. the number of people involved, the proportion of contributions
• Continuity - eg. when the business is intended to be passed onto children
• Set up and ongoing costs
• Tax implications
• How the structure will affect the growth of the business and its ability to access finance, etc
!t is wise to talk to professionals, such as an accountant and a lawyer, for advice.

Deciding on a business name
!f you are not trading under your own name, you need to decide on a trade name for your business. To
check what names are already being used check the following:
• Companies Register (www.companies.govt.nz) - for businesses registered as limited liability companies
• Trade Narks Register at the !ntellectual Properties Office (www.iponz.govt.nz) - to make sure that the
name you have chose does not breach anyone's trademark
• Telecom Yellow Pages (www.yellowpages.co.nz) - for any existing sole traders or partnerships using a
trading name
• Domainz (www.domainz.co.nz) - to check that the !nternet Domain Name is still available to use for your
business

Protecting a business name
Although there is no provision in New Zealand to register a `business name' you may wish to consider
registering a:
• Company - this will ensure no other companies will be registered with an identical company name.
• Trademark - this grants the owner exclusive use of that trademark for a specified range of goods or
services.

The above notes have been compiled to assist you, however, actions taken as a result of this document are at the discretion of the
reader.

Sole trader

This is a single person business. !f another person is involved then a partnership or company structure
should be considered. The sole trader has individual ownership of the business.
Advantages Disadvantages
• Easiest to set up • Not recognised as a separate legal entity
• Low start up costs and cheap to run • Ceases on death of the owner
• Owner has complete control • Difficulty in accessing capital and credit
• Simple tax - business income is part
of owners - may need to register for
GST
• Potential for higher tax bills if earn over
$60,000 than if set up as a company
• No registration required - or any
accounting/auditing procedures
• Unlimited liability - personally liable for
all losses and debts
• You receive all the profits • Limited size and life
• Easy to change structure once
established, or wind up, or sell
• Success depends on the owner's
management and knowledge

• Limited resources - eg. time, money,
management

How to set up as a sole trader

1. !nform Inland Revenue - and check if you need to register for GST. Ask about their Business Tax
!nformation Officers and the free services they offer.
2. Check with your local council that your chosen place of work complies with health and safety
regulations, the Resource Nanagement Act, etc.
3. Certain businesses require a permit before they can start trading (eg. café, second-hand dealer,
butcher, chemist). Contact the local council or relevant trade association for information.
+. Decide on a trade name if you are not trading under your own. Check with the Companies Office
Register, Trade Narks Register, and Yellow Pages to see what names are already listed as companies,
trademarks, and sole traders or partnerships.
5. Open a trading account with your bank. Typically you would use account name like:
YourName Trading as ACNE Services.
6. Check that you are in compliance with the Fair Trading, Consumer Guarantees, Layby Sales Acts, etc.
The Commerce Commission and B!Zinfo have a number of useful publications available on this area.
/. Contact an insurance agent or broker about suitable business insurance. Consider liability, property,
business continuation insurance, loss of income insurance, etc.
8. ACC insurance for self employed people is compulsory and is automatically billed based on your !R3 tax
return details. No registration is necessary. !f you have employees, their premiums are automatically
billed based on your PAYE returns.

Partnership

A partnership consists of a number of individuals conduct their business together in order to make a profit. !t
is often referred to as a firm. The minium number of individuals is 2 and the maximum number allowed is
25. Partners have an equal share in the business, unless stated otherwise in the partnership agreement.
Where provision hasn't been made under the partnership agreement, the Partnerships Act 1908 applies.
Partnerships must file an annual tax return stating each partner's share of the income and partners are taxed
personally on their share.
Advantages Disadvantages
• Easy way to start up a business • Not recognised as a separate legal entity
• Low start up costs and cheap to run • Finding a suitable partner can be difficult
• Business risk, assets, responsibilities
and profit is shared
• Divided authority - therefore requires
trust and confidence in each other
• No registration required - or any
accounting/auditing procedures
• Partnership ends if partner leaves or dies
-remaining partners need new
agreement
• Easier to access capital and credit • File annual tax return for partnership
• Business continuance is possible if
one partner becomes sick or unable to
perform their duties in the business
• Unlimited liability - jointly liable with
other partners for all debts and
obligations incurred by each partner

How to set up a partnership

1. !nform Inland Revenue - and check if you need to register for GST. Ask about their Business Tax
!nformation Officers and the free services they offer.
2. Check with your local council that your chosen place of work complies with health and safety
regulations, the Resource Nanagement Act, etc.
3. Certain businesses require a permit before they can start trading (eg. café, second-hand dealer,
butcher, chemist). Contact the local council or relevant trade association for information.
+. Decide on a trade name if you are not trading under your own. Check with the Companies Office
Register, Trade Narks Register, and Yellow Pages to see what names are already listed as companies,
trademarks, and sole traders or partnerships.
5. Open a trading account with your bank. Typically you would use account name like:
Smith and Jones partnership Trading as ACNE Services.
6. !t is advisable to have a 'Partnership Agreement' in place, drawn up by a solicitor. !t should include
the name, description and place of business, the rights and duties of each partner, profit and tax split,
contribution from each partner, any limitations of authority, provision for the death of a partner, addition
or departure of a partner, dissolutions, etc.
/. Check that you are in compliance with the Fair Trading, Consumer Guarantees, Layby Sales Acts, etc.
The Commerce Commission and B!Zinfo have a number of useful publications available on this area.
8. Contact an insurance agent or broker about suitable business insurance. Consider liability, property,
business continuation insurance, loss of income insurance, etc.
9. ACC insurance for self employed people is compulsory and is automatically billed based on your !R3 tax
return details. No registration is necessary. !f you have employees, their premiums are automatically
billed based on your PAYE returns.

Limited Company

A company is an association of individuals recognised as a separate legal entity and registered under the
Companies Act 1993. The company is separate from its shareholders and directors, therefore the
shareholders have limited liability to the company. Under the Companies Act the directors have certain
defined duties, and the company must have at least one share, one shareholder and one director. There
must be a physical address for the registered office.
Advantages Disadvantages
• Separate entity for legal and tax
purposes
• Nost expensive and complex structure
to set up and maintain
• Flat tax rate of 33¾ • Constitution restrictions may exist
• Financial liability of shareholder is
limited to the value of their
shareholdings
• Personal liability in some instances -
eg. when trading beyond ability to pay
debts
• Shareholders personal and business
affairs are maintained separately
• Annual return - therefore information
on company is open to public inspection
• Nore sources of finance and capital
available
• Closely regulated - ongoing
administrative, regulative and legislative
requirements
• Perpetual succession
• Ownership is transferable
• Although a company structure offers
some protection form creditors, lenders
usually still require personal guarantees to
ensure loans are repaid
How to set up a limited company

1. Select a good solicitor (ask someone to recommend one, contact your district law society, or check the
Yellow Pages).
2. Contact the Companies Office to reserve a name for your company (fee charged). The name will not be
reserved if it is identical or almost identical to that of an existing company.
3. After the Registrar has confirmed your name, you have 20 working days in which to register the
company as per the Companies Act 1993. You will receive a Certificate of !ncorporation. Certain
documents are required to support an application - check with the Companies Office.
+. Open a trading account with your bank. Typically you would use account name like:
ACNE Services Ltd.
5. !nform Inland Revenue - and check if you need to register for GST. Ask about their Business Tax
!nformation Officers and the free services they offer.
6. Check with your local council that your chosen place of work complies with health and safety
regulations, the Resource Nanagement Act, etc.
/. Certain businesses require a permit before they can start trading (eg. café, second-hand dealer,
butcher, chemist). Contact the local council or relevant trade association for information.
8. Check that you are in compliance with the Fair Trading, Consumer Guarantees, Layby Sales Acts, etc.
The Commerce Commission and B!Zinfo have a number of useful publications available on this area.
9. Contact an insurance agent or broker about suitable business insurance. Consider liability, property,
business continuation insurance, etc.
10.ACC insurance for self employed people is compulsory and is automatically billed based on your !R3 tax
return details. No registration is necessary. !f you have employees, their premiums are automatically
billed based on your PAYE returns.


THE BEST LEGAL STRUCTURE FOR RUNN!NG YOUR BUS!NESS

The Best legal structure suitable for your Business depends on factors that include size, the
degree of protection from creditors, the control flexibility you desire, and the tax treatment you
wish to have.
The Following is a comparison of legal structures where several participants are involved:


Partnership Trust Company Unincorporated Joint Venture (JV}
Description Exists where two or more
people carry on a business in
common with view to profit.
Exists when one or more
trustees hold trust property for
the benefit of one or more
beneficiaries.
A Legal entity created
which has the legal powers
of a natural person.
Exists where a group of people pool business resources to carry
on a venture producing benefits for each participant. Usually
for a specific purpose and only for a short duration.
Primary governing
legislation

Partnership Act 1908

Trustee Act 1956

Companies act 1993

No particular legislation
Limited Liability - No limited liability for
partners.

- Partners jointly and severally
liable.
Trustees are prima facie
personally liable but most trust
deeds provide indemnities
except where trustees breach
legal duties.
Shareholders and directors
are personally liable in
general for action of
company.

No limited liability.

Jv partners jointly and severally liable.
Set-up costs
No registration or specific
documentation required, but
useful to have a partnership
agreement.

Trust deed and transfer of
property to the trustees is
required.
- Incorporation
required.

- Useful to have a
constitution and
shareholders' agreement


No specific registration or specific documentation required, but
advisable to have Jv agreement, especially if parties'
contributions differ.
Ongoing Administration
costs



- partnership tax return must
be filed but the return provides
only information, not a
separate tax entity.


- A trust has its own !RD
number.

- Keeping of accounts not
compulsory, but it would be
prudent to do so.
- Annual company return
required.
- Certain actions require
notification to the
companies office and/or
compliance with
companies act.
- Has own !RD Number.
- Specific accounting
records to be retained e.g.
Section 19+ Companies
Act.




No tax return is required.
Keeping of accounts not compulsory.
Who Has Control
Partners unless partnership
agreement provides otherwise.

Trustees, subject to legal duties.
Directors control
management.
Shareholders dismiss or
appoint directors



Jv partners unless Jv agreement provides otherwise.
Flexibility
Flexible, Subject to partnership
agreement.

Flexible, subject to the trust deed
and trustee act.
Less flexible than other
structures. Nust comply with
constitution and companies Act.

Flexible, subject to Jv agreement.
!ncome Tax






!ncome and losses of
partnership are attributed back
to the partnership itself is not a
tax entity.
Tax paid by partners at their
own tax rate.


Trustees income taxed at 33¾
unless distributed to a
beneficiary within six months
after end of year income.
Beneficiaries' income
(Received within six months
after end of income year)
taxed at beneficiaries' own tax
rates.
!ncome of minor beneficiaries
(under age 16) taxed at 33¾.
Other distributions from
qualifying trusts are generally
tax free to the beneficiaries.
Tax losses cannot be passed to
beneficiaries.

Company taxed at 33¾
!n general, tax losses can
not be passed to
shareholders.
+9¾ continuity of
ownership required for tax
losses to be carried
forward.
!ncome tax paid by a
company will create
imputation credits, which
can be attached to
dividends paid to
shareholders.
Certain companies with
five or fewer shareholders
may elect to be treated
like partnership but
shareholders must accept
personal liability for
company's income tax.









Each Jv Partner includes his or her proportionate share in the
joint venture income or loss in own tax return. Unlike a
partnership no tax return is required.

In summery:
1. At one end, a company offers limited liability but is much less flexible and much more costly to establish and
maintain.
2. At the other end an unincorporated joint venture is much more flexible and much less costly to establish and
maintain, but the participants are exposed to personal liability.
3. !n between, partnerships and trading trusts occupy their own niches performing different functions.