choosing the right ownership structure for your small business

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Before you launch into getting a new business off the ground you must decide on the best ownership structure for it. It’s a decision with long-term effects so let’s run through the most commonly adopted options and look at the pros and considerations of each.

Sole Trader

Perfect for a one-person startup or a business you’re only going to be running part-time.

PROS:

  • It’s very simple and inexpensive to set up and maintain.
  • You have total control.
  • You get all the profits.
  • You don’t need to register the business with IR unless you intend to charge GST (you may find the bigger businesses you deal with prefer a vendor that is GST registered) or will be required to pay GST because your turnover is $60K+, or you hire another employee.

 CONS:

  • You are not a separate entity from your business; you personally are liable.
  • Even with good insurance and robust operational practices and processes, your liability is unlimited.
  • It’s not very flexible in terms of tax (this sees many sole traders eventually transfer their business to a company).

Partnership

A partnership is a business formed when two or more individuals are co-owners. Like a sole trader, a partnership is not a separate legal entity from its owners. 

PROS:

  • Less time and cost of complying with necessary legal formalities (compared to a company).
  • Registration requirements are minimal, the same as for sole traders; see above.
  • No legal requirement for a written partnership agreement (but it is highly recommended).
  • Allows individuals to pool assets and skills to increase chances of success.
  • Partnerships and Limited Partnerships offer flexibility for income tax when partners have different tax status 

CONS:

  • You’re jointly liable with each partner responsible for the debts of the other. Consider using a limited partnership structure that offers limited liability; there will be some additional legal compliance requirements with this and significant setup costs when documenting a limited partnership.
  • When it comes to tax; each partner is taxed on a fixed share of profits at their personal tax rate.

Company

This is the most common business structure used in NZ. It is a registered business that is a separate entity to its owner/s and shareholders. 

PROS:

  • Limits your financial liability as you are a separate entity to the business. NB. there are many examples, however, where the director of the company may still have personal liability so consider if that should be you.
  • Offers more flexibility and advantages taxwise as you can split income between shareholders.
  • Puts a good, credible image out there as a company structure is well understood by other businesses, consumers and financial institutions, etc.
  • Lots of free info and resources available online are aimed at companies.

CONS:

  • A lot more legal compliance needs due to it being a separate legal entity
  • Significant ongoing requirements including annual financial, taxation and Companies Office reporting, dealing with company-specific tax issues, as well as the everyday business practices such as record keeping, maintenance of minutes and company statutory registers. 

Trust

Some businesses use Trusts alongside and part of their trading company as a way of providing greater protection for your private lifestyle and passive investment assets. 

PROS:

  • More complete asset protection.
  • Greater tax benefits (this is due to a Trust’s flexibility in allocating profits and capital gains).
  • Confidentiality.
  • A Corporate Trustee can be used for a trading trust

CONS:

  • Considerably more expensive to set up.
  • A lot of work and cost to remain compliant with trust and tax laws.
  • As a trading entity, they’re not terribly practical.

The most successful businesses have a clear structure that defines departments, functions, roles and responsibilities for all employees, allowing them to be more sustainable, scalable and saleable. Let’s make yours clear and workable. Get in touch and enjoy the benefit of decades worth of real-world experience.

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