How should I structure my business?

4 November, 2011 | Tam Irvine

Article updated by Tam Irvine July 2024

When you’re just starting out in business, there are a myriad of factors to consider and an important one that you should discuss with your lawyer is how you should set up the legal structure of your business.

There are a number of alternatives available to structure your business. Which is best for you will depend on a number of factors including the area of business or industry you plan to operate in.

When considering possible structures, it is important to think about:

• Who is going to be involved in the business?
• If the business is to involve more than one person or entity, who will be responsible for the day to day management of the business and what role/duties will each of you have in the business?
• How much are each of you investing?
• What do you expect your financial return will be initially and going forward?  The tax rates for different legal business entities will likely make this a consideration.

Set out below is a brief summary of four types (not exhaustive) of business structure:

SOLE TRADER: The business is owned and operated by an individual. There is no formal documentation or registration requirements but you could register for an NZBN to formalise the business details (for example for suppliers, banks etc). Apply for NZBN here. The business’ income (often referred to as revenue or profit) is taxed at the individual’s marginal tax rate. Individual tax rates are explained here.

PARTNERSHIP: Partnerships are governed by the Partnerships Act 1908 and any partnership agreement (not compulsory). Two or more individuals or entities that own and operate the business are the partners.  There are no formal requirements however it is recommended that a partnership agreement be entered into.

Each partner is liable with the other partners for all of the business’ debts, liabilities and obligations and share equally in the profits (unless otherwise provided in the partnership agreement). Each partner is taxed individually at their marginal tax rate.

LIMITED PARTNERSHIP: This is a relatively new business concept in New Zealand. It combines some of the features of a company and a partnership — and is governed by the Limited Partnerships Act 2008 together with the terms of the limited partnership agreement, which is compulsory.  The limited partnership agreement is a confidential agreement between the parties, which is not required to be registered and is not publicly available.

The limited partnership requires a general partner who is responsible for the management of the business, and limited partners who are effectively passive investors.  There must be at least one general partner and one limited partner at all times (Limited Partnerships Act 2008, s8(1)).|

There is no tax liability at partnership level (i.e. by the general partner) however the partnership must file a tax return.  Limited partners are taxed individually at their marginal tax rate. The benefits of a limited partnership are that limited partners have limited liability unless they also participate in the management of the limited partnership (the individuals who are limited partners can be the same people who are named as a general partner).

COMPANY: Companies are governed by the Companies Act 1993 and the company constitution (where relevant).  The shareholders in the company may also have a contractual arrangement in the form of a shareholders agreement, although this is not compulsory. Every registered company must have at least one director and one shareholder (and they can be the same person). The directors are responsible for the management of the company and owe duties to the shareholders.  The shareholders, being the owners also contribute the business capital. Companies are registered on the Companies Office Register and on registration are provided with a company number.  The companies office register is searchable and provides information on the directors, shareholders, address for service, constitution and other related company documents.

Company profits are taxed at 28% and distributed to shareholders by way of tax-paid dividends. Shareholders only pay tax at the difference between the 28% company tax rate and the shareholder’s marginal tax rate. The primary benefit of a limited liability company is that (unless the constitution of the company provides otherwise) the liability of the shareholders is limited to any unpaid share capital.

Whether you are starting a new business, or purchasing an existing one, it is always a good idea to receive advice from a lawyer experienced in commercial law on the best way to structure your business.  A lawyer can lead you through the benefits, disadvantages and implications of each structure, to ensure you choose the right vehicle for you and your business.

If you would like to discuss the best way to structure your new business, please contact commercial lawyer, Tam Irvine, on 09 837 6837 or email tam.irvine@smithpartners.co.nz