Your business structure should take account of the following factors:
Risk. Business is a very risky place and your business structure should minimise risk as much as possible. Often ignored until it’s too late e.g. when the GST or rent is months in arrears!
Practicality. Overly complicated structures e.g. trading trusts are OK in theory but not very practical to use. Try finding a professional trustee these days!
Cost. Always a factor and whilst spending excessively is unwelcome, saving a few measly dollars could cost you tens of thousands or your house!
Tax flexibility/minimisation. Your business structure should allow you to save tax whilst staying on the right side of the IRD.
Asset protection. For most of us it takes many years to build assets so it makes sense to protect your assets.
So what are the main options in New Zealand?
Sole Trader. Really only suitable for very small or part-time businesses - you get no protection of any kind and no tax efficiency.
Partnership. A partnership is even worse than a sole trader. Not only are you personally liable for all business debts but in addition, you are liable for your partner’s share of business debts as well! Husband and wife partnerships are craziest of all - why risk total financial ruin for both spouses?
Limited Company. A limited company is the standard trading vehicle in New Zealand and is very cheap to set-up and maintain. A limited company offers (subject to reckless or fraudulent trading or personal guarantees) the massive benefit of limited liability protection together with reasonable tax efficiency, and practicality.
Trusts. More expensive to establish, whilst a trust offers total flexibility for distributing profits, tax efficiency and confidentiality they are not particularly practical for trading. However, they are extremely useful for asset protection and not just for business purposes.
Limited Company/Trust Combinations. An excellent, practical structure, the family trust should own the majority of the shares in your company. This minimises risk yet allows the distribution of profits as required to the trust. Two trusts can be better, one for business assets with borrowings and the other for the family home and/or passive income generating assets e.g., the bach. Any guarantees given by the trust or borrowings should be dispensed with or repaid as soon as possible.
Unlike other countries, in New Zealand we are very lucky - we can trade using a limited company yet still remain self-employed for tax purposes. Why on earth wouldn’t you take advantage of such a fantastic opportunity, coupled with a trust or trusts for family wealth preservation spanning the generations?
The information provided here is of a general nature and only applies in New Zealand. You should not act upon this information without obtaining appropriate professional advice and only after a thorough examination of your particular circumstances by an experienced business and tax adviser.