How should I structure my new business?

4 November, 2011 | Peter Smith

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 type of business itself.

When considering possible structures, it is important to think about:
Who is going to be involved in the business? If it will just be you on your own, you could choose to be a sole trader, or to set up a registered company.  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?  This will impact on whether the tax rates for different business entities will be a consideration.
Set out below is a brief summary of four types (not exhaustive) of business structure:

•  Sole Trader
•  Partnership
•  Limited Liability Partnership
•  Company

SOLE TRADER: The business is owned and operated by an individual. There is no formal documentation or registration requirements.
Income is taxed at the individual’s marginal tax rate which at the current tax rates is a maximum of 33% of income which exceeds $70,000.00.
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 debts, liabilities and obligations and share equally in the profits (unless otherwise provided in the partnership agreement). Partners are taxed individually at their marginal tax rate.

LIMITED PARTNERSHIP: This is a relatively new concept in New Zealand.  It is a combination of a company and a partnership and is governed by the Limited Partnerships Act 2008 and the limited partnership agreement which is compulsory.  The limited partnership agreement is not filed and is not publically available.

The limited partnership is made up of general partners who are responsible for the management and limited partners who are 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 paid at partnership level 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 participate in the management of the limited partnership.

COMPANY: A company is governed by the Companies Act 1993 and the company constitution.  The shareholders in the company may also have a shareholders agreement although this is not compulsory. Every registered company must have at least one director and one shareholder.  The directors are responsible for the management of the company and owe duties to the shareholders.  The shareholders, also being the owners contribute the 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’s profits are taxed at 28%.
The 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  It is also easier to sell or purchase shares in a company than it is to buy or sell the assets.

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, Peter Smith, on 09 837 6882 or email peter.smith@smithpartners.co.nz