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Deciding what business structure to go for can be a tough decision for business owners. This is because it can determine how you run your business and whether or not it succeeds. The three main business structures are sole trader, partnership and company. Each one of these structures has its own set of pros and cons. If you are a mechanic, it may be daunting trying to decide which one is best for your business. This article will explain which business structure is best for a mechanic. 

Why Is Business Structure Important?

If you are a mechanic, your business structure will influence how your business is run and determine your tax obligations. Of course, businesses can change business structures as time goes on, but it is always best to choose the optimal business structure at the start of your business’ life. 

Types of Business Structures

Sole Trader

The most common business structure in New Zealand is a sole trader. A sole trader consists of one person who owns their business. They are popular because they are easy to set up and maintain. You do not need to register anything to become a sole trader, and any profit you distribute to yourself is taxable. The tax office taxes this income at the respective income tax rate. 

As a sole trader, you are the only shareholder in the business, so you can make any decision you want. You do not answer to anybody and have complete control over your business. However, this also means that you have full liability for any loss caused by the business. If your business becomes insolvent, you will be personally liable for any debts owing. 

Partnership 

A partnership is similar to a sole trader, but more than one person owns the business. A partnership is usually utilised by law and accounting firms so that employees can buy into the business once they reach a certain level of experience. 

Again, partnerships are easy to set up and do not require much to maintain. They are underpinned by a partnership agreement that can be modified by the consent of all the partners. The partnership agreement is a legally binding contract that will outline the profit-sharing ratios and the process for specific procedures, such as dissolution. However, like a sole trader, partnerships have unlimited liability. This means that partners can be personally liable for business debts. Partnerships also have joint liability, which means that all the partners are liable for the actions of each other.  

Limited Partnership 

A modified version of a partnership is a limited partnership. This means that partners are only liable for business debts equal to what they have invested in the business. This business structure is slowly replacing traditional partnerships as it limits the liability of a partner.

Company


The most formal business structure is a company. You must register your company on the companies register. If you own a company, company laws are also binding for you. A company is a separate entity from yourself which is why it is popular in New Zealand. This means that owners of a company have limited liability and are not liable for any business debts. It is also easier to sell a company because it is a separate entity.

However, the main setback of setting up a company is that it can be an expensive process. You will also be obligated to pay company tax on your profits.

Which Business Structure Is Best?

All three structures can be beneficial for your business. However, if you are starting your business by yourself, it may be best to start as a sole trader. This is because it is inexpensive and easy to set up. Once you employ more staff and start to grow, then you can change to a company. This gives you the ability to sell the business if the right buyer comes along.

Key Takeaways

Many potential business owners struggle with deciding what business structure to go for when starting their business. It is important to weigh up the benefits and drawbacks of each structure when deciding which business structure to choose. For a mechanic, your business structure will depend on your fiscal capacity and expertise. Starting as a sole trader allows you to trade without an expensive start-up cost. The good thing is you can always change your business structure if your circumstances start to evolve. 

If you need any legal assistance with the business structures, contact LegalVision’s business lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Do I have to register a partnership?

No, but you do have to inform Inland Revenue that you have set up a partnership.

How do I change from a sole trader to a company?

You will have to register a company and transfer your assets and liabilities to the company.

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