Reading time: 6 minutes

How you decide to structure your business is a crucial part of setting it up. What business structure you choose, for example a partnership or company, affects how your business operates in the law, and what it is protected against if something goes wrong. In New Zealand, the three most common business structures are:

Each of these structures has different advantages and disadvantages, and are catered to different circumstances. It is important to consider what your business circumstances are and what structure would be of benefit to you. To help in that process, this article will compare two of those structures:

  1. partnerships; and 
  2. companies. 

What Is a Company?

A company is separate from the people who run and own it. It is a ‘separate legal entity’. This means that if something were to go wrong and your company owed a debt to someone, the company would be liable rather than its directors and shareholders. 

Directors run and manage the company, and shareholders own parts of it in the form of shares. If your business has multiple owners and you want to look for investors in the future, structuring your business as a company may be an advantageous option.

There are certain regulations you have to follow if your business is a company. You have to register your company at the Companies Office, where it goes on a public register that anyone can look up. You also have to file annual returns and you are bound by company law. There may also be higher administrative costs associated with running a company because you have additional regulations that you have to follow.

Benefits of a Company

Benefits to structuring your business as a company include that:

  • you are not personally liable for risk – the company itself is;
  • it is easier to keep your business assets and personal assets separate;
  • your tax rate is lower than individual rates;
  • it is easier to sell a company because it is a separate legal entity; and
  • the company is not tied to one person, so it can grow even after that person is not involved anymore.

What Is a Partnership?

A partnership is a business structure where two or more people or organisations form a partnership and work together to run the business. You usually set this out in a partnership agreement. This details how you are splitting the profits and debts of the business, as well as its day to day running. This also establishes a fiduciary relationship between the two parties. This means that there is an element of trust to this relationship and the partners have to operate in good faith. Partnerships generally suit smaller businesses that do not have several owners, as a company does.

A partnership does not have the same financial reporting requirements that a company does, and overall is a much simpler business structure. Each partner is taxed at their own individual rate, as the partnership is not charged income tax as a business.

For example, if you and your friend are two architects wanting to open an architecture firm together as professionals, a business partnership may be the most appropriate option.

Benefits of a Partnership

Some benefits of running your business as a partnership include that:

  • it is relatively simple and cost-effective to run;
  • there are usually fewer financial reporting obligations;
  • you can offset some losses against other sources of personal income;
  • there are fewer administrative fees to set up a partnership;
  • costs and responsibilities are shared between partners; and
  • you can share the load of running a business and therefore specialise according to each partner’s strengths.

Comparison Between a Partnership and a Company Structure

Comparison

Company

Partnership

Liability

Directors and shareholders are not personally liable for the company’s debts unless directors act carelessly. 

Partners are personally liable for all business losses, and personal assets may be at risk.

Setting Up

A company has to register at the Companies Office, register a name and pay the associated fees. 

Partnerships need to apply for an IRD number, get an NZBN and should enter into a partnership agreement.

Annual Reporting Requirements

Companies have annual returns they have to complete for the Companies Office and make regular financial reports to Inland Revenue. This is in addition to tax returns, ACC invoices for the company, and updating their business information on the NZBN register.

Partners need to file annual tax returns for the partnership and each partner, make ACC payments for each partner and update business information on the NZBN register.

Shutting Down

Companies require a shareholder resolution to close and need to inform both IRD and the Companies Office.

Partnerships need a partnership resolution to close and need to inform IRD.

Selling On

You can change shareholders and investors of a company by selling shares, without having to close the company itself.

A partnership closes when one partner leaves or a new one joins. This means you have to end the partnership and start an entirely new one.

Key Takeaways

Partnerships and companies are both viable business structures if they suit the nature of your business. If your business is small and you are not planning on massive growth, a partnership may be more suitable for you. However, if your business has multiple owners and you are planning on growing with further investment, a company may be more appropriate. If you would like more information or help with your business structure, contact LegalVision’s business and commercial lawyers on 0800 005 570 or fill out the form on this page.

What is a company?

A company is a way that you can structure your business. You create a separate legal entity and name it, and that company holds your assets and gains profit. A company is managed by directors and owned by shareholders.

What is a partnership?

A partnership is when you and another person or organisation partner together and run a business. This is usually set out in a partnership agreement, and you split the profits and debts accumulated through your commercial dealings.

What is better, a partnership or a company?

Both business structures have their benefits and can be useful in different ways, depending on the nature of your business. If you intend for your business to grow and gain investors, and there are multiple owners, then a company would be more suitable. If your business is smaller and only a couple of you own it, then a partnership may be better for you.

Can a partnership become a company?

You can decide to change your business from a partnership to a company. First, you would need to dissolve the partnership, and then go through the registration process of creating a company.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. From just $119 per week, get all your contracts sorted, trade marks registered and questions answered by experienced business lawyers.

Learn more about LVConnect

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

Our Awards

  • 2019 Top 25 Startups - LinkedIn
  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards