Should you class your business as a sole trader or a company?

You’ve got some thinking to do. Evaluate the pros and cons of each of these business structure types and the right path should make itself clear.

What are the most significant changes?
Company
Changes in business structure

Sole Trader

A sole trader is a person trading on their own. People who opt for this business type can usually get started without any formal or legal processes.

Pros

  • Quick and cheap (you can start trading with your own name and personal IRD number)
  • You are personally entitled to all profits
  • First-time provisional taxpayers may be entitled to a 6.7% tax discount 
  • You’re able to employ others (except yourself and family members) to help run the business 
  • You control, manage, and own the business

Cons

  • You’re personally liable for business taxes, business debt, and any claims made against you. In some situations, even your home can be placed at risk
  • Profit can’t be split for tax purposes. If you earn a reasonable amount, the highest tax rates will apply
  • You can’t employee family members without IRD approval

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Company

The most frequently chosen

Registering as a company turns your business into a separate legal entity. Amongst the benefits, one stands out: the business assumes ownership of assets and responsibility for debt.

Pros

  • Your business gets a more commercial look and feel (it’s perceived as a sign that you can be trusted to be here for the long-term)
  • You get a degree of tax flexibility*, with the option of retaining profits in the company or paying them out to shareholders
  • Your personal liability is restricted, which gives business owners some protection from creditors and other claims
  • Shareholders’ liability for losses is limited to the value of their shares in the company

Cons

  • Incorporation costs money (you’re able to do it yourself on the Companies Office website for $124.39 + GST, or we can take the entire hassle out of your hands for $245 + GST)
  • Your company must produce annual financial statements and file its own tax return. All of our packages cover you for the financial statements and up to three tax returns (no matter if you’re a sole trader or trading as a company)
  • The limited personal liability of shareholders doesn’t extend to directors. If you, as a director, fail to carry out your statutory duties (they’re set in the Companies Act), you may be personally sued for breach of duty
  • The company must file an Annual Return with the Companies Office each year (different from a tax return to the IRD). Your Annual Return and its $60 filing fee is included in almost all of our pricing
  • The Companies Office and Inland Revenue have strict procedures for companies to cease operations. These include cancelling GST and PAYE registrations, distributing company assets (which may have GST and tax implications), preparing final financial statements, as well as additional shareholder and director resolutions

* The exception is when 80% of a company’s services are provided to one customer. Or, when 80% of the company’s services are performed by the sole shareholder.

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Changes in business structure

There’s a new twist to be aware of from 1 April 2021. A top tax tier is being introduced for individuals – taxing any earnings over $180,000 at 39%.

Because the company tax rate will remain at 28%, it may be tempting to reduce your income tax by moving from a sole trader to a company. However, Inland Revenue may well consider this tax evasion if you have no other reasons for changing your business structure.

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Still feeling lost on which structure fits you best? Don’t hesitate to give us a bell and we’ll help you make the right move. support@beany.com or 0800 755 333.

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