BUSINESS LEGAL STRUCTURES

 

 

To determine the most suitable structure you will need to consider a number of factors such as:

Which structure is right for the type of business you intend to run (eg. some professions can only be sole traders or partnerships)
Owner’s liability
Whether the business is new or already established - and a one-off project or on-going
Internal structure - eg. the number of people involved, the proportion of contributions
Continuity - eg. when the business is intended to be passed onto children
Set up and ongoing costs
Tax implications
How the structure will affect the growth of the business and its ability to access finance, etc

It is wise to talk to professionals, such as an accountant and a lawyer, for advice.

 

DECIDING ON A BUSINESS NAME

If you are not trading under your own name (ie. John Doe) you need to decide on a trade name for your business. Check what names are already being used and the availability of the name you are considering at the following locations:

Companies Register (www.companies.govt.nz) - for businesses registered as limited liability companies
Trade Marks Register at the Intellectual Properties Office (www.iponz.govt.nz) - to make sure that the name you have chose does not breach anyone’s trademark
Telecom Yellow Pages (www.yellowpages.co.nz) - for any existing sole traders or partnerships using a trading name
Domainz (www.domainz.co.nz) - to check that the Internet Domain Name is still available to use for your business

 

PROTECTING A BUSINESS NAME

Although there is no provision in New Zealand to register a ‘business name’ you may wish to consider registering a:

Company - this will ensure no other companies will be registered with an identical company name.
Trademark - this grants the owner exclusive use of that trademark for a specified range of goods or services.
 

 

SOLE TRADER

This is a single person business. If another person is involved then a partnership or company structure should be considered. The sole trader has individual ownership of the business.
 

Advantages

Easiest to start up
Low start-up costs and cheap to run
Owner has complete control
Simple tax - business income is part of owners - may need to register for GST
No registration required - or any accounting/auditing procedures
You receive all the profits
Easy to change structure once established, or wind up, or sell

Disadvantages

Not recognised as a seperate legal entity
Ceases on death of owner
Difficulty in accessing capital and credit
Potential for higher tax bills if earn over $60,000 than if set up as a company
Unlimited liability - personally liable for all losses and debts
Limited size and life
Success depends on the owners' management and knowledge
Limited resources - eg time, money, management

 

PARTNERSHIP

A partnership consists of a number of individuals conduct their business together in order to make a profit. It is often referred to as a firm. The minium number of individuals is 2 and the maximum number allowed is 25. Partners have an equal share in the business, unless stated otherwise in the partnership agreement. Where provision hasn’t been made under the partnership agreement, the Partnerships Act 1908 applies. Partnerships must file an annual tax return stating each partner’s share of the income and partners are taxed personally on their share.
 

Advantages

Easy way to start up a business
Low start-up costs and cheap to run
Business risk, assets, responsibilities and profit is shared
No registration required - or any accounting/auditing procedures
Easier to access capital and credit
Business continuance is possible if one partner becomes sick or unable to perform their duties in the business

Disadvantages

Not recognised as a seperate legal entity
Finding a suitable partner can be difficult
Divided authority - therefore requires trust and confidence in each other
Partnership ends if partner leaves or dies - remaining partners need new agreement
File annual tax return for partnership
Unlimited liability - jointly liable with other partners for all debts and obligations incurred by each partner

 

LIMITED LIABILITY COMPANY

A limited liability company is an association of individuals recognised as a separate legal entity and registered under the Companies Act 1993. The company is separate from its shareholders and directors, therefore the shareholders have limited liability to the company. Under the Companies Act the directors have certain defined duties, and the company must have at least one share, one shareholder and one director. There must be a physical address for the registered office.
 

Advantages

Seperate entity for legal and tax purposes
Flat tax rate of 33%
Financial liability of shareholder is limited to the value of their shareholdings
Shareholders personal and business affairs are maintained seperately
More sources of finance and capital available
Perpetual succession
Ownership is transferable

Disadvantages

Most expensive and complex structure to set-up and maintain
Constitution restrictions may exist
Personal liability in some instances - eg when trading beyond ability to pay debts
Annual return - therefore information on company is open to public inspection
Closely regulated - ongoing administrative, regulative and legislative requirements
Although a company structure offers some protection from creditors, lenders usually still require personal guarantees to ensure loans are repaid

 

 

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