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Trying for the Business Triumph

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Gaining profit is the key motivation of a person in starting up a business. The risks attached to it may be lessened if the entrepreneur has enough knowledge of the types of business structure and benefits in NZ.

1. Sole Trading

The most common entity is the sole trading. Generally, it is owned and directed by a person who accepts all the legal terms and conditions relating to the entity.

Benefits

This business is normally easy to put up because only a few things are required: the proprietor’s personal Inland Revenue Department (IRD) number, appropriate permits and licenses, and a fairly low capital to start operating.

A sole proprietor has the direct control over his business and is entitled to the business structure and benefits in NZ. As the sole manager, he may run his enterprise according to how he thinks it can prosper. Additionally, he can easily change the type of structure should he decide that he needs to.

Since the entity is taken over by a single person, all of the profit generated by the business is his own. The difference of the total profit and the incurred expenses, known as the net income, is taxed based on the individual tax rates.

Downfall

Raising a large capital in a sole proprietorship business may be difficult since the entrepreneur can only invest as much of his personal money and property.

A sole trader shoulders all the legal claims against his business. He is subject to unlimited liability wherein he is obliged to use his own assets if the entity cannot pay its creditors anymore. Moreover, if the enterprise incurs a loss, he shoulders all of the costs attached herewith.

Since this is not a separate legal entity, the proprietor is required to file a personal IR3 income tax return annually. In addition, on the second year of the business operation, he may already be subject to provisional taxes.

2. Partnership

The second type of business structure and benefits in NZ is the partnership. In this venture, two or more people contribute for the capital in the formation of the enterprise. A partner may contribute cash, land or property, or skills and talents for the progress of the business.

Benefits

A partnership business is easy to organize and requires only a small amount of start-up costs. More capital is provided here so further promotion of the business is expected. Borrowing capacity is also greater since more individuals are included in the business.

Throughout the year, partners can withdraw funds from the entity for personal use. At the end of every year, the profit or loss provided by the business is divided among them and is based on the rate they have agreed. The money received by each partner is then taxed according to the rate of an individual tax payer.

Downfall

Partners generally have unlimited liabilities which means that they have unrestrained degree of paying the debts and obligations of their business. They are therefore held liable even beyond the total worth of their investments which may lead to challenges for business entities and downfall in NZ operationscould be inevitable.

Issues and conflicts may arise from among the partners which may lead to the dissolution of the business.

3. Company

Among the four business entities and benefits NZ is the company. Unlike sole proprietorship or partnership, a company has already its own legal identity. This denotes that everything, including assets and liabilities, is its own.

Currently, there are two types of companies operating in New Zealand: the public and the private companies. Public companies have shares available to the general public. This is an attractive type of business structure and benefits in NZ investors opt to enter such business arrangements. On the other hand, private companies are owned by a public group in order for them to maintain control and management over their business.

Benefits

The directors, who manage and administer the business, and the shareholders, who invest their money to obtain shares and ownership, have a limited liability. This implies that they cannot lose their personal assets just to pay the debts of the company. Furthermore, transactions and agreements regarding the transfer of ownership of a stockholder to another party are simple.

Profits, in the form of dividends, are allocated to shareholders and are then subject to their personal income tax. Shareholders have the option of either getting their gross share and pay the subsequent taxes or receiving their net income after tax. In case of losses, the losses cannot be counterbalanced against the shareholders’ other income. This is for appropriate computation of their income taxes.

Downfalls

Forming a company is not as easy as setting up a sole trading or a partnership. The structure is complicated and start-up costs are expensive. This type of business is mandated by the law to be incorporated with the Companies Office, which holds every public record of the shareholders and directors. Moreover, the profits of the shareholders are subject to tax.

4. Trust

The last type of business structure is the trust. A trading trust is a legal entity which administers in holding the property, estate, fortune, or wealth on behalf of the beneficiary.

Benefits

Trust business involves having a trust deed wherein specific provisions are noted and listed that the trustee and beneficiary both agree. It also has vast powers with regard to borrowing and lending and satisfactory security for trustees. Income is taxed based on marginal tax rates, which means that if the business suffers from a low profit, less impact on business structure and benefits in NZ of having a lower tax payable are expected.

Downfall

The trustees do not own the assets delegated to them and they are entitled to some legal duties and responsibilities in relation with the properties of their clients. This form requires professional guide as this is indeed a complicated venture.

Another major pitfalls of this business structure and downfall in NZ is that the remaining profit not distributed to the beneficiaries is then subject to the trustee rate of 33%. In the occurrence of losses, the trustees can forward it to the succeeding year but they are not allowed to pass this obligation to the beneficiaries.

In the end, understanding the basic business entities and benefits in NZ may help an aspiring entrepreneur plan his desired venture. 

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