Most New Zealand businesses pick a structure at the start, on limited information, and never revisit it. That is usually survivable and occasionally expensive, because the right structure depends on things that change — profitability, risk exposure, who else is involved and what you eventually intend to do with the business.
Sole trader
The simplest option. You trade in your own name using your own IRD number, and business income is your income taxed at your personal marginal rates.
Suits: low-risk activities, early-stage businesses testing an idea, contractors with professional indemnity cover and no employees.
The limitation is liability. There is no separation between you and the business. Business debts are your debts, and business claims reach your personal assets including your house. For any activity with meaningful third-party risk, that is the reason to move on.
Losses can offset your other income, which is genuinely useful in early years and is the main tax attraction.
Partnership
Two or more people trading together. The partnership files a return but is not itself taxed — income flows through to the partners at their own rates.
The critical feature is joint and several liability. Each partner is liable for the partnership’s obligations, including those incurred by the other partners without your knowledge. That is a significant exposure to accept on the strength of a friendship.
A written partnership agreement is essential and frequently absent. It should cover contributions, profit shares, decision-making, what happens if a partner wants out, dies or becomes incapacitated, and how the business is valued in those situations. Partnerships that fail without an agreement fail expensively.
Company
A separate legal entity. Income is taxed at the company rate, and profits distributed to shareholders as dividends carry imputation credits for tax already paid, so income is not taxed twice.
Limited liability is the main reason to incorporate, and it is genuine but not absolute. Directors owe duties under the Companies Act 1993 and can be personally liable for breaching them, particularly around reckless trading. Lenders routinely require personal guarantees, which puts your personal assets back on the line for the debt they cover.
Companies suit businesses with employees, meaningful liability exposure, multiple owners, external investment, or an intention to sell. Selling shares in a company is generally simpler than selling the assets of a sole trader operation.
The costs are ongoing compliance — annual return, financial statements to a required standard, keeping the register current — and rather more formality than most first-time directors expect.
Look-through company
An LTC is a company for legal purposes, giving limited liability, but is transparent for tax — income and losses flow through to owners at their personal rates.
The attraction is combining limited liability with the ability to use losses against other income. That makes it common in property investment and in businesses expected to make losses in early years.
The rules are specific: eligibility requirements around ownership and shareholder numbers, an election that must be made in time, and loss limitation rules that cap deductible losses to the owner’s investment. Getting the election wrong or missing the deadline produces an outcome nobody wanted.
Trusts
Trusts are frequently part of a structure rather than the trading entity itself — commonly holding shares in the trading company or owning land leased to it.
The trustee tax rate is 39 percent, with a $10,000 de minimis at 33 percent, and trusts carry substantial disclosure obligations. Trusts remain valuable for asset protection and succession; they are less attractive purely for tax than they once were.
How to actually decide
Work through in this order:
- Risk. What is the worst realistic claim against this business? If the answer reaches your house, you want limited liability.
- Other people. Anyone else with an ownership stake means you need a documented agreement whatever the structure.
- Profitability trajectory. Early losses favour flow-through treatment; sustained profits above your personal thresholds favour a company.
- Exit. If you intend to sell or bring in investors, a company is easier.
- Compliance appetite. Be honest about whether you will keep up with the obligations.
Changing later
Structures can be changed, but restructuring can trigger tax consequences — depreciation recovery, disposal of trading stock, GST on asset transfers. It is cheaper to get it approximately right at the start and to review deliberately at growth points rather than to restructure under pressure.
The Companies Office publishes incorporation and compliance requirements, business.govt.nz publishes a structure comparison tool, and Inland Revenue publishes guidance on LTCs and partnerships — all free.
General information only, not legal or tax advice.
