Sole Trader

As a sole trader, you trade as an individual, using your own name or a chosen business name. You do not need to register with the Companies Office; however, you will need to register with Inland Revenue (IRD) for tax purposes. You may decide to get a New Zealand Business Number (NZBN), but it is not mandatory. Your business income is included in your personal income tax return, and you may need to register for GST if your annual turnover exceeds $60,000.

Pros:

• Simple and low-cost setup: minimal paperwork and few ongoing obligations.
• Full control: you own and control the business, earning you make all the business decisions and keep all profits.
• Straightforward tax reporting: business income is taxed at your personal rate.

Cons:

• Unlimited liability: you are the business are legally the same, you are personally responsible for business debts and legal claims. This means your personal assets, such as your home or savings, could be at risk.
• Limited growth potential: harder to attract investors or outside funding.
• Less formal image: may appear less credible to larger clients or suppliers.

Limited Liability Company

A limited liability company is a separate legal entity, created by registration with the New Zealand Companies Office under the Companies Act 1993. The Company is the one that enters into contracts, own assets, and can be sued. You will need at least one shareholder and one director (who must live in New Zealand or Australia).

Pros:

• Limited liability: separate legal entity which exists independently of its owners (shareholders). This means shareholders are generally not personally liable for company debts, protecting personal assets.
• Professional credibility: having “Limited” in your business name can build trust with customers and investors.
• Easier to scale: you can issue shares, bring in investors, and separate personal and business finances.

Cons:

• Higher setup and compliance costs: registration, annual returns, and accurate record-keeping are required.
• Director responsibilities: directors must comply with the Companies Act, including duties to act in good faith and avoid trading while insolvent. If a director breaches their duties under the Act, they can be personally liable.
• Separate taxation: the company pays 28% corporate tax, and any dividends you take may be taxed again personally.

Choosing Between Them

If you are starting small and want minimal admin and limited financial risk, a sole trader structure is often best. However, if you plan to grow, hire staff, or take on financial risk, a limited liability company offers better protection and credibility. Before deciding, it is wise to consult a both an Accountant and a Lawyer to ensure your choice fits your business goals and obligations.