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Many different business structures are available to you if you want to start your own business. You can choose to operate business as a sole trader, partnership, or company. These three different structures all have very different legal and financial obligations. It is essential to understand the distinction between them to ensure that you are paying tax correctly. This article will outline how each business structure works and how different structures are taxed in New Zealand. Additionally, we will outline goods and services tax (GST) and when it may be appropriate for your business to pay it. 

Sole Trader

Sole traders are people who start their own businesses as an individual person. They do not register their business as a company. Often, these people are tradespeople or those who have skills to market and profit from. It is quick and easy to become a sole trader, and you do not have to undertake a formal registration process. Likewise, you have total control over the business and its profits. However, you are also responsible for paying off the debts you accrue as a sole trader, which can put your personal assets at risk. 

As a sole trader, you pay income tax as an individual. You do not need to set up a separate tax account for your sole trader business, as you technically are the business for legal purposes. You are also responsible for the business ACC levies

Most sole traders pay tax in one go at the end of the financial year. To do this, you need to ensure that you keep thorough and meticulous records of the amount you are withdrawing from your business. 

No matter the business structure, you need to ensure that you keep detailed records of your business’:

  • income;
  • expenses; and 
  • profits. 

It is vital to ensure that you are paying the correct amount of tax, particularly if anyone disputes your tax amounts. If there is an issue with your business taxes, you may face serious legal consequences.

Partnership 

A partnership is when two or more people form a business. A partnership agreement will typically govern a partnership, setting out how each partner will share the business’:

  • profits; 
  • expenses; and 
  • responsibilities. 

This business structure can be beneficial as it allows you to share the business’ challenges with a like-minded partner. Typically, this business structure suits architects, lawyers, and accountants. 

A partnership, unlike a company, is not a separate legal entity. Therefore, a partnership does not pay tax collectively. The income is distributed between all partners, who pay income tax on their payments from the business. Typically, each partner will file a tax return annually stating their profit from the partnership, which they will then be taxed on. Additionally, the partnership itself will need to submit a tax return outlining the business’s expenses and profits. Therefore, you will need to register for a partnership tax number

Company

Companies work slightly differently. Companies are separate legal entities from the people who own and operate them. Therefore, there is an extensive process of registration to register a company. Likewise, there is continual annual upkeep that you must do to maintain your company status. 

Additionally, the distinction between companies and shareholders links to the accountability of owners in the case of debts. For a company, because it is a separate legal entity, the directors and shareholders are not personally liable for the company’s debts. So, company directors and shareholders enjoy the protection of limited liability.

This is different for a sole trader who is considered as one and the same as their business, putting their personal assets at risk if anything goes wrong.  

Further, a company will have both income and expenses. A company will be taxed on its profits – its income minus expenses. Also, the company’s directors will receive a salary from the company’s earnings over the year. This amount will be taxed according to each director’s personal tax rate. Additionally, if a company distributes profit to shareholders, the shareholders will then pay income tax on these amounts.  

GST

No matter what type of business structure you have, if you earn over $60,000 in 12 months, you will need to register for a goods and services tax (GST). This will add 15% to the price of your products and services, which goes to the government. However, it will also mean that you can claim back the GST you pay when buying goods and services for your own business. 

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Key Takeaways 

It is essential to understand how different business structures are taxed so that you do not end up breaching your tax obligations as a business owner. Sole traders, partnerships, and companies pay tax at different amounts, and knowing these differences is essential. Additionally, if your business earns more than $60,000 in 12 months, you will need to consider whether or not you want to apply for GST. 

If you need help understanding how different business structures are taxed in New Zealand, our experienced business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

Do I need to register for GST as a sole trader?

If your business is earning more than $60,000 in 12 months, you will need to register for GST no matter the type of business structure you have.

Do I need to pay tax individually if I am in a business partnership?

Yes, you need to pay tax as an individual if you are in a business partnership. However, you will also need to file a partnership tax return outlining business incomes and expenses. Therefore, you will need to register for an IRD number for your partnership.

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