It’s crucial to pick the appropriate structure when launching a firm.
In this article, we’ll take a look at the two most popular company structures, corporations, and sole proprietorships. We’ll conclude with some advice for managing your firm.
SOLE TRADER
Many people choose to operate their businesses as sole proprietorships due to the absence of a formal setup requirement. All that is needed is to start trading. As the business expands, hiring or contracting employees can assist with the workload. Although there are fewer compliance requirements, tax laws and other laws still apply to all businesses.
However, there are several drawbacks to operating as a sole proprietor. The most significant one is personal liability for everything. If the business experiences financial difficulties and owes money to creditors, personal assets such as a car, house, or savings may need to be sold to pay off debts. It is for this reason that sole trader liability insurance is advised. Additionally, it may be challenging to attract investors or hire staff members when operating as a sole proprietor.
HOW TO SET UP A BUSINESS AS A SOLE TRADER IN NEW ZEALAND
Step 1: Register for an IRD number
In New Zealand, all businesses must have an Inland Revenue Department (IRD) number. You can register for an IRD number online or by filling out a paper form. You will need to provide your personal details, such as your name, address, and contact information.
Step 2: Register for GST
If you expect your business to earn more than NZ$60,000 per year, you must register for Goods and Services Tax (GST). GST is a tax on the consumption of goods and services in New Zealand. You can register for GST online or by filling out a paper form.
Step 3: Choose a business name
Choosing a business name is an important part of setting up your business. Your business name should be unique, easy to remember, and relevant to your business. You can check the availability of your preferred business name on the Companies Office website.
Step 4: Open a business bank account
It is important to keep your personal finances separate from your business finances. You can open a business bank account with any New Zealand bank. You will need to provide your IRD number, business name, and other relevant information.
Step 5: Obtain any necessary licenses and permits
Depending on your business activities, you may need to obtain certain licenses and permits. For example, if you plan to sell alcohol, you will need to obtain a liquor license. You can check the requirements for your business on the New Zealand government’s business website.
COMPANY
In contrast, a company has a distinct legal personality as it is incorporated. It is the company that makes hiring decisions and signs contracts, making it a flexible structure for having co-founders or obtaining investment. Companies also have limited liability, meaning that usually, the company (not the founder) must make payments if it owes money.
Although it is straightforward and inexpensive to form a company through the NZ Companies Office website, directors have responsibilities and compliance requirements under the Companies Act, such as maintaining accurate company documents and behaving in the business’s best interest and good faith.
The best business structure depends on the specific business and its needs. Generally, a company is suitable if the business desires to expand, may require financing, faces risks or responsibility if things go wrong, and wants to protect itself against those risks.
However, certain companies or industries may prefer other structures, such as trusts and limited partnerships. Businesses can adjust their structure later, although it may incur costs or missed opportunities. Seeking advice from a specialist or conducting online research is recommended. If signing personal guarantees is necessary, they should be avoided, and contracts should be entered into only have you have consulted a professional.
