I’m a Sole Trader – Should I Restructure My Business to a Company?

Restructuring a business in New Zealand is straight forward enough to do but have you considered if you need to in the first place? Ultimately it depends on your situation.

With Beany, we don’t charge any more to look after a company than a sole trader or partnership (but some accountants might charge more). Once a year, you also have to file an Annual Return to Companies Office which costs $45 – unless you’re a Beany client – we do it for free!

You can buy a company for $160 at Companies Office directly (www.companiesoffice.govt.nz/companies/) or we can set it up for you for $245 plus GST.

However, once you have set up a company, the advantages are as follows:

  1. If someone chases your company for money, they cannot come after you personally (unless you’ve been negligent as a director) – that’s why it’s called limited liability – it’s limited to the value of the company.
  2. It looks more impressive in the market place – this is an intangible benefit but some of your customers will take you more seriously if you’re a company, not a sole trader.

And the big question, will it save tax? 

There are so many variables to consider that we cannot say categorically, but if the following apply, it is very likely:

  • You make more than $70,000 in net profit each year.
  • You have a partner who helps out and doesn’t make more than $70,000 from other sources.
  • Your income comes from multiple sources (that is, not from a single contract)

If you work as a sole trader, then all your income over $70,000 will be taxed at 33 cents.  The corporate rate is 28% and if you can income split with your partner, you could use the lower marginal rate.  

Example

You make $100,000 each year. As a sole trader, you pay $23,920 in tax.

You form a company and your partner owns 1% of the company.  You can allocate a fair market salary to yourself of $70,000 and then pay your partner the other $30,000 for help with stock management and book keeping. They have other income of $30,000 from another part time position.

Total tax to pay for both of you = $20,770 – that’s a saving of $3,150.

In fact, in a recent survey we did of a sample of our clients, on average they saved $4,000 per year through careful tax planning.

Looking for tips to increase your business profit? Click here.

Always ask your accountant as every situation is different.  Or contact support@beany.com for more information.

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