How to structure your business

Introduction

If you are intending to buy or establish a business (see related articles How to buy a business ), you will need to consider how you should structure it. There are a number of options to consider, and these are listed below.

Sole trader

Operating as a sole trader is the simplest form of operation and suits many small businesses. The individual personally owns all assets and receives all profits, but also personally bears all responsibilities and all liability for losses.

Partnership

Under the partnership option, two or more parties carry on business with a common purpose. (The term "firm" is used to refer collectively to the individuals who make up the partnership.)

This form of operation has many of the advantages of a sole trader, but the assets and responsibilities are shared by the partnership. Unlike a company, a partnership is not a separate legal entity. It is, however, required to file tax returns. (See How to enter into a business partnership agreement ).

As well as ordinary partnerships, there are also "special partnerships", which allow a person to be a partner on the terms that his or her liability to the firm's creditors will be limited, like that of a shareholder in a limited-liability company (see below). Unlike the ordinary partnership, a special partnership must be registered with the High Court.

Limited-liability company

Unlike a partnership, a limited-liability company is a separate legal entity. Among other things, this means that the company can sue and be sued in the name of the company as if it were a natural person.

In general, if the company is liquidated (wound up) the liability of a shareholder of a limited-liability company is limited to any amounts that are unpaid on the shareholder's shares. In practice this transfers the risk of business failure from the shareholders to the business's creditors.

To be registered as a company, a company must have at least one share, one shareholder and one director. You must first reserve a name for the company with the Companies Office, and then apply for the company to be registered and incorporated under the COMPANIES ACT 1993 (see How to form a company ). It is, however, possible to buy an "off-the-shelf" company that has already been registered, and then apply to change the company's name.

Trading trust

Another possible business structure, although not popular in New Zealand, is that of a trading trust. Here, those who own the business are separate from those who receive the benefit of the income from the business (see How to set up a trust).

Cautionary notes
  • It is advisable that you obtain legal advice before setting up your business. Your lawyer will be able to advise you as to which business structure will, for example, limit your personal liability and give you the best tax benefits.


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