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In Short
- A company is a separate legal entity, while a sole trader and the owner are legally the same.
- Companies offer limited liability, but involve more cost and compliance.
- Sole traders are simpler and cheaper, but carry personal risk for business debts.
Tips for Businesses
Compare risk, cost and growth plans before choosing a structure. If your business has higher liability or outside investors, a company may suit you better. For low-risk or early-stage ventures, sole trader status can be practical. Keep good records and review your structure as your business grows.
Summary
This article explains the differences between operating as a company or a sole trader for business owners in New Zealand. It outlines legal, tax and risk considerations and is prepared by LegalVision's business lawyers, who specialise in advising clients on business structures and commercial law.
Whether you are starting a new business or purchasing an existing one, one of the most important decisions you will make is how to structure your business. In New Zealand, most small business owners choose to operate either as a sole trader or through a company. Both structures are legally recognised and have their own advantages and disadvantages. Making an informed decision early can save time, money, and potential legal issues later. This article outlines how each structure works, the pros and cons of each, and key considerations to help you decide what is right for your situation.
Sole Traders
A sole trader is someone who runs a business in their own name, without creating a separate legal entity. It is the simplest and most cost-effective business structure available in New Zealand. You do not need to register with the Companies Office, and you can start trading almost immediately.
Sole traders are especially common among people:
- starting a business for the first time;
- turning a hobby or side hustle into a business; or
- working as contractors or freelancers for other businesses.
Liability and Risk
One of the main drawbacks of being a sole trader is that you are personally responsible for all business debts and obligations. If something goes wrong, such as:
- a customer dispute; or
- unpaid debt, your personal assets (like your home or savings) could be at risk.
While business insurance can help reduce this risk, it may not always cover every liability. Because there is no separation between you and your business, creditors can pursue you personally for outstanding debts.
Paying Tax as a Sole Trader
As a sole trader, your business income is treated as personal income. You use your personal IRD number for tax purposes and pay tax at the standard individual income tax rates. You must also:
- register as an employer with Inland Revenue (IR) if you hire staff;
- obtain an NZBN (New Zealand Business Number) free and useful for dealing with government agencies; and
- register for GST if your annual revenue exceeds $60,000.
Even if you earn less than $60,000, registering for GST can be beneficial because you can claim GST credits on business expenses.
Advantages of a Sole Trader
Advangtages includes, but are not limited to, the following:
- quick, simple, and inexpensive to start;
- complete control over all business decisions;
- easy to manage finances and reporting;
- direct access to business profits; and
- fewer compliance and filing obligations than other companies.
However, as your business grows, the lack of legal separation between you and your business can become a disadvantage, particularly when seeking investment, hiring more staff, or taking on significant debt.
Companies
A company is a separate legal entity, distinct from the individuals who own or manage it. This means the company can own assets and property, enter into contracts, and be sued, all in its own name.
Companies are managed by directors, who make business decisions, and owned by shareholders, who invest in the business and receive profits in the form of dividends. Because ownership is divided into shares, companies are ideal if you plan to bring in business partners or investors.
Limited Liability
The major advantage of a company is limited liability. If the business incurs debt or is sued, the company is liable, not the individual directors or shareholders (unless they act unlawfully). This separation protects personal assets, which is particularly valuable for businesses in riskier industries such as construction, manufacturing, or technology.
However, directors can still be personally liable if they:
- breach their directors' duties under the Companies Act 1993;
- commit fraud or act dishonestly; or
- personally guarantee company debts (a common requirement in early-stage companies).
Paying Tax as a Company
A company has its own IRD number and pays tax on its profits at the corporate tax rate of 28%, which is lower than most personal tax rates:
- 30% for income between $48,000 to $70,000;
- 33% for income between $70,000 to $180,000; or
- 39% for income above $180,000.
This can make companies more tax-efficient for profitable businesses. The company files its own annual return and tax return, and shareholders pay tax only on dividends they receive.
Companies can also claim tax deductions and depreciation on expenses such as:
- rent and utilities;
- business equipment;
- insurance and professional fees; and
- vehicles and travel costs.
Maintaining separate business bank accounts and accurate financial records is crucial. This not only simplifies tax compliance but also reinforces the company's separate legal identity.
As with sole traders, companies must register for GST once annual revenue exceeds $60,000 and register as an employer if they have staff.
Key Takeaways
Both structures have merit, but the best option depends on your business goals. If you are starting small and want a simple setup with minimal cost and paperwork, operating as a sole trader may be best. But if you are looking to expand, attract investment, or protect personal assets, setting up a company offers greater flexibility and long-term advantages.
It is also possible to start as a sole trader and transition into a company later when your business grows. This approach allows you to test your business concept before committing to a more complex structure. However, you should be aware that restructuring can have tax implications that need to be carefully considered before making the change.
LegalVision provides ongoing legal support for New Zealand businesses through our fixed-fee legal membership. Our experienced lawyers help businesses manage contracts, employment law, disputes, intellectual property and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision's legal membership, call 0800 005 570 or visit our membership page.
Frequently Asked Questions
Should I start my business as a sole trader or a company?
Whether a sole trader or company structure is best for you will depend on your circumstances, business size, and business plans. If you want a business that is easy to set up and run, a sole trader structure can be used. However, sole traders risk their personal assets because they are personally liable for their losses. In contrast, a company has startup costs and accounting requirements. Nonetheless, it allows you to limit your liability for losses and access a flat tax rate. For most businesses, we recommend setting up a company rather than operating as a sole trader.
Do sole traders need to pay GST?
If your sole trader business makes over $60,000 in annual revenue, you must register for GST with the IR. Once you register for GST, you must start charging 15% GST on the goods and services you sell and complete regular GST returns to the IR.
Is it better to pay tax as a sole trader or as a company?
The company tax rate is 28%, which is lower than the highest income tax rates for individuals. As such, there are tax advantages to operating your business through a company. However, this will depend on how much you earn as a sole trader.
Can a sole trader become a company later?
Yes. You can transfer your business assets, contracts, and clients into a newly registered company at any time. Many business owners do this once they begin hiring or seeking investment. However, restructuring can have tax implications, so it is important to obtain professional advice before making this change to ensure you understand the tax treatment and that the transition is structured appropriately.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
