When you start a business in New Zealand, one of the first decisions you need to make is how to structure it. The two most common options are operating as a sole trader or setting up a limited liability company. Each has its own advantages, disadvantages, and tax implications, and the right choice depends on your circumstances.
In this guide, we will compare the two structures across the areas that matter most: tax, liability, compliance, and flexibility.
What Is a Sole Trader?
A sole trader is the simplest business structure. You operate the business in your own name (or a trading name), and there is no legal distinction between you and the business. All the income the business earns is your personal income, and all the debts and obligations of the business are your personal debts and obligations.
Setting up as a sole trader is easy and cheap. You do not need to register a company or file separate company accounts. You simply start trading, keep records of your income and expenses, and file a personal tax return at the end of the year.
What Is a Company?
A company (also called a limited liability company or LLC) is a separate legal entity from its owners (shareholders). It has its own IRD number, files its own tax return, and can own assets, enter contracts, and sue or be sued in its own name.
Setting up a company requires registration with the Companies Office. There are annual compliance requirements, including filing an annual return, maintaining a share register, and keeping proper company records. You also need to file a separate company tax return each year.
Tax Differences
This is where the biggest practical differences lie.
Sole trader tax: As a sole trader, your business income is added to any other personal income and taxed at the personal income tax rates (10.5%, 17.5%, 30%, 33%, or 39% depending on your total income). If your business earns $100,000 in profit, that is taxed as your personal income.
Company tax: A company pays tax at a flat rate of 28% on its profits. This is lower than the top personal tax rates of 33% and 39%. However, when you extract money from the company (as salary or dividends), that income is then taxed in your hands as personal income.
The company structure can provide a tax advantage if you do not need to take all the profits out of the business each year. Money left in the company is taxed at 28%, whereas if you took it all as personal income, the portion above $78,100 would be taxed at 33% or 39%. This allows you to defer some personal tax and reinvest in the business at a lower tax rate.
However, if you need to extract all the profit for living expenses, the overall tax burden of a company can be similar to or even slightly higher than a sole trader, because of the interaction between company tax, salary PAYE, and dividend imputation credits.
Liability Protection
This is the other major difference. As a sole trader, you have unlimited personal liability. If the business incurs debts it cannot pay, or if someone sues the business, your personal assets (home, car, savings) are at risk.
A company provides limited liability. The shareholders' liability is generally limited to the amount they have invested in the company (their shares). If the company cannot pay its debts, creditors generally cannot come after your personal assets. There are exceptions — directors can be held personally liable for trading while insolvent, health and safety breaches, and certain tax obligations — but the general principle is that the company is a separate entity.
For any business where there is a risk of significant liability (client claims, physical risks, large contracts), the liability protection of a company structure can be very valuable.
Compliance and Costs
Sole trader: Minimal compliance. You need to keep financial records, file a personal tax return (IR3), and register for GST if your turnover exceeds $60,000. There are no annual filing fees or company returns to worry about. An accountant might charge $500 to $1,500 per year for a simple sole trader tax return.
Company: More compliance. You need to file an annual return with the Companies Office (approximately $45 per year), maintain company records, file a company tax return (IR4), and potentially file personal tax returns for any shareholder-employees. Accounting fees for a company are typically $1,500 to $4,000 or more per year, depending on complexity.
The extra compliance costs of a company are a real consideration, especially for smaller businesses. If your profit is relatively modest, the accounting fees can eat into any tax savings.
Paying Yourself
As a sole trader, the business income is automatically your personal income. You do not need to pay yourself a salary — the profit is simply yours.
With a company, you need to decide how to extract money. The main options are:
- Salary — you employ yourself and pay a PAYE salary. This is a deductible expense for the company and taxable income for you.
- Dividends — the company declares a dividend to shareholders. Dividends carry imputation credits (reflecting the company tax already paid), which reduce your personal tax on the dividend.
- A combination — most company owner-operators pay themselves a mix of salary and dividends, structured to minimise the overall tax burden.
Getting the salary-dividend mix right is one of the main reasons company owners use an accountant. The optimal split depends on your total income, KiwiSaver situation, ACC levies, and other factors.
ACC Levies
Sole traders pay the ACC earner's levy on their net self-employment income, plus a work levy based on the industry they operate in. Company owner-operators who pay themselves a salary also pay ACC levies, but the work levy is paid by the company.
The ACC implications can differ slightly between the two structures, particularly around the level of cover you receive if you are injured. Company directors who pay themselves a salary get cover based on that salary. Sole traders get cover based on their net self-employment income. If your salary from the company is lower than your actual drawings from the business, your ACC cover might be lower too.
Which Structure Should You Choose?
Here is a rough guide:
- Choose sole trader if: your business is small, low-risk, and you need to keep things simple. If your annual profit is under $70,000 and you have no significant liability concerns, a sole trader structure is usually the best starting point.
- Choose a company if: your annual profit exceeds $78,100 (where the 33% personal rate kicks in), you want liability protection, you plan to reinvest profits in the business, or you want to bring in investors or partners in the future.
Many businesses start as sole traders and convert to a company later when they grow. This is perfectly normal and relatively straightforward to do.
Final Thoughts
There is no one-size-fits-all answer. The right structure depends on your income level, risk tolerance, growth plans, and personal circumstances. If you are just starting out and keeping things simple, a sole trader structure is usually fine. If your income is higher, you want liability protection, or you plan to scale, a company is worth the extra compliance.
Use our New Zealand salary calculator to model different income scenarios and see how the tax brackets affect your take-home pay under each structure. And consider talking to an accountant — the cost of good advice is usually far less than the cost of getting your structure wrong.