One of the first decisions any New Zealand entrepreneur or freelancer faces is whether to operate as a sole trader or set up a company. Both structures are legitimate, and both have distinct advantages and disadvantages when it comes to tax, liability, compliance costs, and flexibility. The right choice depends on your income level, growth plans, risk profile, and personal circumstances. In this guide, we compare the two structures in detail so you can make an informed decision.
Sole Trader: Simplicity and Lower Costs
A sole trader is the simplest business structure in New Zealand. You and the business are legally the same entity. There is no separate registration required (beyond an IRD number), no company office costs, and minimal compliance overhead. You include your business income and expenses in your personal tax return (IR3).
Key tax features of being a sole trader:
- Business profits are taxed as personal income at your marginal tax rate (10.5% to 39%)
- You can deduct legitimate business expenses before calculating your taxable income
- You pay provisional tax if your residual income tax is more than NZ$5,000
- You must pay ACC levies based on your self-employed income and industry classification
- You may need to register for GST if your turnover exceeds NZ$60,000
The main advantage is simplicity. There are no company annual returns, no director obligations, and your accounting costs are lower. You can deduct expenses directly and see the tax benefit immediately. Our sole trader tax calculator shows you exactly how much tax you would pay as a sole trader at different income levels.
Company: Tax Rate Advantage at Higher Income
A New Zealand company (typically a limited liability company or "Ltd") is a separate legal entity from you. It has its own IRD number, files its own tax return (IR4), and pays tax at the flat company rate of 28%. This is lower than the personal tax rate of 33% (for income NZ$78,101–NZ$180,000) or 39% (above NZ$180,000).
Key tax features of operating through a company:
- Company profits are taxed at a flat 28%
- You pay yourself a salary, which is taxed at personal rates (PAYE)
- Profits left in the company after your salary are taxed at 28% only
- If you later take those profits out as dividends, they attract further personal tax, but with imputation credits to avoid double taxation
- You have limited liability – the company's debts are not your personal debts (with some exceptions)
Tax Comparison: When Does a Company Save Tax?
The tax advantage of a company structure depends on how much profit you retain in the business versus how much you pay yourself. Here is a simplified comparison for different profit levels:
- NZ$60,000 profit: As a sole trader, your tax is approximately NZ$11,020. Through a company, if you pay yourself NZ$60,000 salary, the tax is the same because it flows through to personal rates. No advantage.
- NZ$100,000 profit: As a sole trader, your tax is approximately NZ$23,920. Through a company paying yourself NZ$70,000 salary and retaining NZ$30,000, total tax is approximately NZ$22,120 (NZ$13,720 PAYE + NZ$8,400 company tax). Modest advantage.
- NZ$200,000 profit: As a sole trader, your tax is approximately NZ$60,100. Through a company paying yourself NZ$100,000 and retaining NZ$100,000, total tax is approximately NZ$51,920. Significant advantage of NZ$8,180.
The key insight is that the company structure primarily saves tax when you can retain profits in the company rather than drawing them all out as salary. If you need every dollar of profit for personal expenses, the advantage diminishes because dividends attract additional tax (offset by imputation credits, but the total tax usually ends up close to the personal marginal rate).
Use our company tax calculator and sole trader tax calculator to compare the exact numbers for your situation.
Limited Liability: The Non-Tax Advantage
Beyond tax, one of the most significant reasons to operate through a company is limited liability. As a sole trader, you are personally liable for all business debts. If the business fails or is sued, your personal assets (house, car, savings) are at risk. A company provides a legal separation between business and personal assets.
However, limited liability is not absolute. Directors can be held personally liable for trading while insolvent, for certain tax debts, and for health and safety breaches. Banks also commonly require personal guarantees from directors for business loans, which effectively removes the limited liability protection for that specific debt.
Compliance and Cost Considerations
Operating a company comes with additional costs and obligations:
- Company registration: NZ$150 to incorporate through the Companies Office
- Annual return: NZ$50 per year to the Companies Office
- Accounting costs: Company accounts and tax returns are more complex, typically costing NZ$1,500–NZ$4,000 per year for a small business (compared to NZ$500–NZ$1,500 for a sole trader)
- PAYE obligations: If you pay yourself a salary, you must run PAYE, file employment returns, and manage KiwiSaver contributions
- Director duties: Legal obligations around financial management, record keeping, and acting in the best interests of the company
These costs need to be weighed against the tax savings. If the tax advantage is NZ$2,000 per year but the additional accounting and compliance costs are NZ$2,500, you are worse off in a company. The breakeven point is typically around NZ$80,000–NZ$120,000 of annual profit, depending on your circumstances.
The Bottom Line
For lower-income self-employed individuals (under NZ$70,000–NZ$80,000 in profit), a sole trader structure is usually the best option due to its simplicity and lower compliance costs. For higher earners who can retain profits in the business, a company can provide meaningful tax savings and liability protection. The exact crossover point depends on your specific situation, including how much profit you need to draw and your risk profile.
Model the numbers before making a decision. Use our sole trader tax calculator and company tax calculator to compare the two structures at your income level. And consider talking to an accountant, as the decision has implications beyond just tax, including how you fund retirement through KiwiSaver, how you access ACC cover, and how you structure your business for future growth.