Which business structure is best in NZ?

A sole trader is the simplest way to start a business in New Zealand. You operate the business in your own name, and all profits (and losses) belong to you personally.

A sole trader is not a separate legal entity, which means you have unlimited liability—both business and personal assets may be at risk if something goes wrong.

From a tax perspective, sole traders must file a personal tax return (IR3) each year, prepare annual financial statements, and include the business’s net profit in that return, along with any other income. Income is taxed at your personal marginal tax rate.

If your turnover exceeds (or is expected to exceed) $60,000 in any 12-month period, you must also register for GST. ACC levies are charged personally based on your taxable income and can fluctuate year to year.

Sole traders can only raise funds through personal borrowing, as ownership can’t be shared. Banks often require personal guarantees for loans since there’s no separation between personal and business finances.

A sole trader business does not continue if the owner passes away or becomes incapacitated. This affects succession planning and makes it harder to sell the business, as you can only sell the assets (e.g. equipment, client list), not the business itself.

Example: A rental property owned personally or an independent contractor working in their own name.

A partnership is similar to a sole trader but involves two or more people (or entities) going into business together. Partners share profits, losses, responsibilities, and decision-making.

While partnerships are easy to set up, it’s strongly recommended to have a written partnership agreement outlining roles, profit-sharing ratios, decision-making processes, and exit terms.

New Zealand has two types of partnerships:

• General Partnerships (GP) – all partners have unlimited liability. Each partner can be held responsible for the actions or debts of the others.

• Limited Partnerships (LP) – consist of at least one general partner and one limited partner. The GP manages the business (similar to a company director), while the LP is a passive investor and is liable only up to their investment.

For tax purposes, the partnership must prepare financial statements and file a partnership tax return (IR7) to allocate profits or losses between partners. Each partner includes their share in their own tax return and pays tax at their personal rate. Partnership losses can offset a partner’s other income.

Note that a partnership ends if a partner leaves, dies, or becomes incapacitated, which affects continuity.

A limited liability company is the most common and preferred structure in New Zealand. It’s a separate legal entity, meaning it can enter contracts and is taxed separately from its shareholders.

Shareholders own the company, while directors manage it. Directors must act in good faith, avoid reckless trading, and ensure the company remains solvent under the Companies Act 1993.

Companies must:

• File an annual return with the Companies Office
• Prepare annual financial statements
• File a company tax return (IR4)
• Maintain records such as share registers, resolutions, and minutes of key decisions for at least seven years

A major tax advantage is the company tax rate of 28%, lower than the top personal rate. Shareholders working in the company can pay themselves via shareholder salary, PAYE wages, or dividends, each with different tax outcomes.

Companies also offer continuity—the business continues regardless of changes in ownership—and make it easier to raise capital, bring in investors, or sell in the future.

A trust isn’t usually used to trade directly, but it can own a business or assets through its trustees, who manage them for the benefit of beneficiaries. Many NZ business owners use family trusts alongside companies for asset protection, succession planning, and long-term wealth management.

Since gift duty was abolished in 2011, assets can be transferred into trusts more easily, though proper documentation remains essential. Trusts can last up to 125 years, making them valuable for multi-generational planning.

A trust requires:

• A settlor (who sets it up)
• Trustees (who manage it)
• Beneficiaries (who receive benefits)

The trust deed governs operations and must be followed carefully.

For tax purposes, trusts prepare financial statements and file a trust tax return (IR6) (note: you had IR7, which is actually for partnerships). Trust income is taxed at 39%, unless distributed to beneficiaries, in which case it’s taxed at their personal rates.

A common setup is for a trust to own the shares of a company, combining trading flexibility with asset protection. It’s vital to set up trusts correctly and seek independent legal and tax advice.

The best structure depends on your goals, income, risk tolerance, and long-term plans.

• A sole trader structure may suit an independent contractor with minimal risk.
• A company is better for a growing business wanting flexibility and continuity.
• A trust may be ideal for those focused on asset protection or legacy planning.