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When you are first planning for your online business, you have to decide early on what kind of business structure you will use. In New Zealand, three of the most common business structures are:

What structure you choose will significantly impact how you run your business. Each kind has its strengths and weaknesses and varies in administrative intensity and financial obligations. You have to consider which structure best suits your business and your unique situation. It is possible to change your structure in the future, but that can be a costly and time-consuming process, so it is best to thoroughly evaluate your options now. This article will go through each of these three structures and compare their usefulness for business online.

How to Structure Your Online Business as a Sole Trader or Self Employed

Many small businesses start with self-employment because it is a relatively simple structure and does not require high administrative costs. You would set yourself up as a sole trader, sole proprietor or a contractor, and are the business’s sole owner. This means you have complete control over the business operation and you get to keep all of the profits. You do not have to go through a legal process to register your business with the government, and you are taxed in your personal capacity. However, this also means that you are personally liable for any losses.

Operating as a sole trader is a flexible structure that may suit someone hoping to turn their hobby into an online business or sell their homemade products online. If you are just starting out with your business, and you do not intend to expand significantly in the future, this business structure may suit you. It is comparatively cheaper and easier to set up and may be attractive if you want to set up a small business operating from home or a small store with an online component. 

Advantages

Advantages of a sole trader structure are that:

  • there are relatively low and straightforward administrative costs;
  • it is easy to set up, run, and close;
  • there are simpler tax obligations; and
  • you have full control over your business.

Disadvantages

Disadvantages of a sole trader structure are that:

  • you are personally liable if something goes wrong;
  • personal assets and business assets are not automatically kept separate;
  • potential growth is limited; and
  • it is harder to sell your business and gain investment.

How to Structure Your Online Business as a Partnership

A partnership is similar to a sole trader business structure, except it involves partnering with one or multiple people. You set out in a partnership agreement how you will split business operations and responsibilities between partners, and you both take a share in the profits. This may be easier because it shares the load, and you also have another person to bounce your ideas off of for the business.

A partnership may be a useful business structure if you want to split the work of a physical store going online. 

For example, one of you handles the in-store sales, and the other handles the online sales. Alternatively, if you and a couple of friends decide to create an online consulting business together, this could be the structure you would use.

Advantages

Advantages of a partnership structure are that:

  • it is relatively simple to set up and run;
  • you can split the work of running a business according to each individual’s strengths;
  • costs, losses, and profits are shared; and
  • you will have simpler tax obligations.

Disadvantages

Disadvantages of a partnership structure are that:

  • you are personally liable for the partnership’s debts as a whole, which may put your personal assets at risk;
  • if one of you leaves the partnership, then the business dissolves; and
  • potential for disagreements over business decisions.

How to Structure Your Online Business as a Company

Registering your online business as a company is another potential option. You create your business as a separate legal entity, with its own name, and it holds its own assets. Here, your personal assets and business assets are kept separate. This also applies to personal liability and debt. Shareholders own shares in the company, and directors manage it. You have to register your company with the Companies Office to go on a public register.

This structure is best suited for your online business if you are a serious startup with multiple business owners, and you intend to expand and gain investors. 

For example, this may be a suitable business structure if you are developing an app that you intend to enhance and grow, and you are looking for investors to invest in your app. 

Advantages

Advantages of a company structure are that:

  • you can keep your business assets and personal assets separate;
  • you are not personally liable for business debts;
  • there is better flexibility for growth and investment;
  • if someone leaves, the company can continue; and
  • these structures provide greater market credibility.

Disadvantages

Disadvantages of a company structure are that:

  • there are annual reporting obligations;
  • they are more expensive to set up;
  • there are heavier administration concerns;
  • you need to meet more complicated tax obligations; and
  • there is, overall, more regulation of companies over other structures.

Key Takeaways

Choosing the right structure for your online business is an important decision that will affect how your business operates in the future. You need to ask yourself what kind of business you want to create, and how much you will grow as time goes on. If you would like more information or help with what business structure to choose for your online business, contact LegalVision’s online business lawyers on 0800 005 570 or fill out the form on this page.

FAQs

What structure is best for an online business?

What structure is best for you depends on your situation. Many people who start out with a small online business will find that structuring as a sole trader is useful, because of the simplicity. But, if more than one person is involved, then structuring as a partnership or company may be the better option.

What are my options for structuring my business?

The three most popular business structures in New Zealand are sole proprietorship, partnership, and company. Each has its pros and cons, so you need to consider your own business goals and situation to determine which will suit you best.

Do I need a company to sell online?

No, you do not need a company to sell products or services online. But, if you want to keep profits from your online sales separate from your own personal assets, then setting up your business as a company may be a viable option.

Who owns a company?

Directors manage the running of the company, while shareholders own shares in the company. This means that the company is jointly owned by its shareholders, who have more power depending on the proportion/value of the shares they own.

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