Business Structure Basics

💼 Tax and Liability for Each

Sole Trader

You and the business are the same. Profit is your income, taxed at your personal rates in your own return. It is simple and cheap to run, but you are personally liable for the debts of the business.

Partnership

Two or more people share the business. The partnership itself files a return, but each partner is taxed on their share of the profit at their personal rates. Partners are generally personally liable, and a partnership agreement is wise to set out shares and responsibilities.

Company

A company is a separate legal person. It pays company tax on its profit, and shareholders are taxed when profit is paid out to them, with imputation credits passing on the tax already paid. The big draw is limited liability: generally your personal assets are protected if the company fails, subject to exceptions like personal guarantees.

⚖️ Choosing a Structure

Weighing the Trade-offs

Questions to Ask Yourself

• How much personal risk does the work carry?
• Is profit likely to be large enough that a company rate helps?
• Do you want to bring in partners or investors?
• How much admin and cost are you willing to take on?

Start Simple, Change Later

Many people begin as a sole trader because it is cheap and easy, then move to a company as the business grows, the risk rises, or the tax position changes. Changing structure is common and normal.

💡 Setup, Switching and Mistakes

Setting Up

• Sole trader: Use your IRD number; register for GST if required.
• Partnership: Get an agreement, an IRD number for the partnership, and register for GST if required.
• Company: Incorporate through the Companies Office, get a company IRD number, and meet ongoing filing duties.

Common Mistakes

Mistake 1: Incorporating Too Early

A company adds cost and admin. For a small, low-risk side business, a sole trader is often enough to start.

Mistake 2: Assuming a Company Always Saves Tax

The company rate is not automatically better once profit is paid out to you and taxed again. Run the numbers for your situation.

Mistake 3: Ignoring Liability Risk

If the work carries real risk, staying a sole trader leaves your personal assets exposed. Weigh protection against cost.

Mistake 4: No Partnership Agreement

Going into business with someone without a written agreement invites disputes over shares, decisions, and exits.

A Simple Decision Path

See our self-employed tax and provisional tax material for the tax side. Final word: sole trader, partnership, and company each balance tax, liability, cost, and growth differently. Start with what fits now, and change as the business grows. Because the tax and legal consequences are real, this is general information only; get professional advice before choosing or changing your structure.