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A company is one of the most common ways of structuring a business in New Zealand. Companies offer businesses an array of benefits, including:

  • a shield from downside risk, in the form of limited liability;
  • tax advantages and efficiencies; and 
  • a high growth potential. 

Companies are associated with successful and professional businesses. Hence, your business may well find it easier to attract new investment and borrowing when you structure it as a company. This article sets out three of the main benefits of structuring a business as a company in New Zealand.

Limited Liability Protection

The most common way of structuring your business as a company is forming an entity with limited liability. The term ‘limited liability’ refers to the fact that the liability of the company’s shareholders is limited concerning their responsibility for the company’s debts. This means that the company is responsible for any debt that it incurs, and shareholders do not personally take on those debts if the company fails.

Keep in mind, however, that you can also form unlimited liability companies

This limited liability is hugely valuable and important. It means that shareholders have certainty and protection over their personal assets. If the company fails, shareholders do not need to sell their house or car to pay back their creditors. This is because a limited liability company is its own legal entity, offering confidence to anyone considering investing in your business. 

This protection is relevant to your business in a few different ways. If you are a shareholder, you will benefit from this protection. Secondly, you will find it easier to attract other investment if those investors do not need to worry about being personally liable for your business’ debts. 

Company Tax Rate

If you structure your business as a company, its profits will be taxed at the New Zealand company tax rate of 28%. This is lower than the top tax rates for individuals, though it is higher than the lower tax rates for individuals. Accordingly, many companies pay less tax as a result of this business structure. However, you should check with a lawyer or accountant to see the possible ramifications for your business. 

There are other considerations, like being able to offset business expenses against income to reduce the tax bill. Your company should be able to claim back many of the costs of doing day-to-day business. 

There are some benefits as well in terms of returning profits to shareholders. You can distribute profits to shareholders as dividends, who are then taxed individually on their personal income. Any tax your company pays on its profit can also be attached to the dividend as a credit. Again, you should check with a lawyer or other specialist if you have any questions about this. 

Growth Potential 

There are various ways in which structuring your business as a company can open up new growth opportunities for your business. One of these, as previously discussed, is the limited liability structure offering certainty to investors. Additionally, a company structure means that you can add new shareholders and investors relatively easily by issuing additional shares. You can also transfer or sell the company more easily, proving attractive to potential investors even if you have no immediate interest in selling. 

You should also consider that a company structure is the most common way of structuring successful, high-growth businesses. It is a signal to the market that your business is:

  • professional; 
  • potentially open to new finance; and 
  • serious about shareholder responsibilities, amongst others. 

Key Takeaways

When considering how to structure your business, there are benefits to operating as a company. This is because the company structure offers protection of personal assets from seizure in the event of business failure. There are also more subtle benefits, such as the growth opportunities that may be easier to capture as a company. There are also tax advantages for most companies.

If you want to know more about structuring your business, contact LegalVision’s business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What does limited liability mean?

Limited liability means that the liability of the company’s shareholders is capped and cannot encroach on those shareholders’ personal assets. A limited liability company is responsible for any debt that it incurs and shareholders do not personally take on company debts.

Do companies pay less tax?

Companies do not necessarily pay less tax than other businesses, as it depends on how much money the business makes and how it would otherwise be structured. Sometimes the variable tax rate for individuals will result in less tax than the company tax. However, most medium-to-large businesses will save money on tax if structured as companies.

Is a company structure a good structure for fast-growing companies?

Yes, most fast-growing businesses will structure themselves as companies. This is because companies are great structures for bringing on new investors and seeking new finance. Companies are also associated with growth to a greater extent than other business structures, such as sole traders or partnerships.

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