The Inland Revenue has different tax rates for the different structures, and your customers might want to know, so they know with whom they are contracting. Basically, anyone you owe money to will want to know if they should “chase” you, your partner, or the company.
Sole Trader
A sole trader operates a business on his or her own. The trader controls, manages and owns the business and is entitled to all profits but is also personally liable for all business taxes and debts.
Many New Zealand businesses start as sole traders, which doesn’t require legal incorporation, and then progress to an incorporated company as the business grows. Others choose to form registered companies right from the start to take advantage of the protection and other benefits offered by the official company structure.
Partnership
If you want to partner up with someone else then you could form a ‘partnership’, ideally with an agreement but not always. Partnerships are most common among professional people and in the farming industry. In a partnership two or more people run a business together. Each partner:
- Shares responsibility for running the business
- Shares in any profits or loss equally, unless the partnership agreement states otherwise
- Is liable for any debt within the partnership
Many partnerships are established with a formal partnership agreement. The partnership itself does not pay income tax. Instead, it distributes the partnership income to the partners. The partners then pay tax on their own share.
In the past, this was the standard business structure of professional people (lawyers, doctors and accountants) but partnerships are no longer as popular since a Limited Liability Company is now open to professionals and it arguably offers better protection. Remember, a well thought out partnership agreement is essential to cover all contingencies and possible conflicts.
Limited Liability Company (LLC)
If you want to separate the business from your personal life, then you may want to form an official company. You need to register and go through a process before this can happen.
Companies can be registered (incorporated) online (total cost: NZ$163.55 as of 2012). The LLC has proven to be the most popular and successful form of business structure.
The Companies Office is the best place place to start when forming an LLC.
Non-profit organisations
A non-profit organisation is any society, association or organisation that is not carried on for the profit or gain of any member, and has rules that do not allow money, property or any other benefits to be distributed to any of its members.
Loss Attributing Qualifying Company (LAQC)
This structure involves applying to be recognized by the Inland Revenue as a Loss Attributing Qualifying Company. This gives you a special tax status that allows you to offset any losses incurred in running your business against your personal income from other sources (such as investments). However, other taxation implications are quite complex, so discuss this option with your accountant before making any decisions.
For more information on LAQC companies visit Inland Revenue's website - Qualifying Companies Guide IR435 .
Trading Trust
Trading Trusts can offer benefits, but they are complicated and also require expert advice. Discuss this option with your accountant and your lawyer to see if it is more appropriate for your needs than the business structures outlined above.
Co-operative
A co-operative business is owned and democratically controlled by its shareholder/members.
People (or entities) involved in a co-operative business choose to work together to achieve business goals that may not be possible or as easily achieved through individual or separate effort.
The shareholders/members contribute the prime capital for the business and share in the profits of the business in proportion to their participation: the greater the participation, the larger the proportion of profits.
A good resource: choosing a business structure . Complete information can be found HERE . It is also important to seek professional advice from your accountant, lawyer, or business adviser to determine the most appropriate structure for your operations.