What sort of entity should I be? Sole Trader, Partnership, Company or Trust?
They type of entity you decide on will depend on your personal circumstances.
Being a sole trader, means that you are the only person running the business and you will be personally responsible for all business costs. You’re solely responsible for any debt and that includes IRD for GST, PAYE & Kiwi Saver (if you employ staff). At the end of the year, your net profit goes onto your personal tax return and you will be responsible for the tax payable.
Operating as a sole trader means that your use your personal IRD number for your business.
If you decide to be a sole trader, you need to keep in mind that you won’t be able to put yourself on the payroll and pay yourself a wage with PAYE deducted. So if you want to put yourself on wages, being a sole trader may not be the best option for you.
A partnership is when you are going into business with someone else. This could be someone else putting money into the business to get you going, someone who is going to working in the business with you or perhaps your spouse.
It means there will be more than you involved in the business and you will be jointly responsible for the bills and any debts that are owed to IRD. At the end of the year, the profit in the business gets split between you and your partner (or partners) and you each become responsible for your portion of the end of year tax on that profit.
To become a partnership, you will need to register your business with IRD so that it has its own IRD number that is separate to your personal IRD numbers.
Operating as a company is more involved and one of the most important things to remember is that you will need to treat the business as completely separate to your personal property and bank accounts.
Although a company can provide you with a certain amount of limited liability to keep your business debt and dealings separate from your personal assets, you need to be aware of your duties as a director and ensure that you are meeting them so that your personal assets are still protected. Failure in your duties as a director could mean that your personal assets could be in jeopardy and in the worst-case scenario, you could end up in court for not doing things right.
Just because you own the company, doesn’t mean that you can just take the money out when there is spare money in the bank. If you take out more money than you have put into the company, this could create a tax bill for you at the end of the year so you need to be careful and understand what the company owes you and what you can draw out. This is where its crucial to have a clear understanding of your financial accounts. I would recommend that you get an accountant on board as soon as you can to walk you through this so you are making informed decisions along the way.
A company will also mean that you will need to reserve a name with the Companies Office and set your company up and you will then be required to file “annual Companies Office returns” each year to ensure that your company stays current with them. When you register your company with the Companies Office, you will be allocated an IRD number at the same time and the Companies Office will get this set up with IRD for you.
Trusts are not an entity that I would normally recommend setting up your new business as however in some circumstances, it could be appropriate. Trusts can be expensive to set up and can be more involved than operating under the other types of entities that are available. If you are thinking about setting up your business as a Trust, you will need to enlist the advice and support of a solicitor to set up your Trust and to help you determine the reasons for wanting to operate as a Trust and to ensure it is set up correctly and that you fully understand the purpose of your Trust and what you are aiming to achieve. If your solicitor (and your accountant) agree that a Trust is right for you, then the Trust will need to be registered with IRD so that it obtains its own IRD number for you to operate under.
Each entity type has its advantages and disadvantages, so you need to make an informed decision to make sure you have it set up right at the start.
