Advantages far outweigh disadvantages with 'qualifying companies'

By GLENN SMITH

The best small business structure for asset protection, tax minimisation, name-protection and overall credibility is clearly the limited liability company (often referred to as an "incorporated company").

The previous four articles in this series have focused on the various company structure options open to the small business owner.

Here we discuss the qualifying company (QC) and loss attributing qualifying company (LAQC) options.

What are QCs and LAQCs, and what are their advantages?

A qualifying company is a limited liability company that has elected to pay tax (if any) on its capital gains and net profits at the company tax rate of 33 per cent before paying tax-free dividends to its shareholders.

A loss attributing qualifying company is a qualifying company that has elected to pass its operating losses on to its shareholders so that they can offset the losses against their own income in order to pay less personal tax overall. This is common for companies which own rental properties, which often operate at a loss.

An LAQC is also a QC, however a QC is not automatically an LAQC. Most companies elect to become an LAQC because it encompasses all potential tax advantages, regardless of whether the company makes a profit or a loss.

How does a business become a QC or an LAQC?

Any New Zealand-owned company with five or fewer shareholders can be one. Married couples are classed as one shareholder, as are a parent and child, so most small-to-medium New Zealand businesses meet the criteria.

It costs nothing to elect to become a QC or an LAQC. The shareholders and directors simply complete an IRD form (IR436) and once their QC or LAQC election is confirmed by the Inland Revenue Department, they can take advantage of their new company status from their next financial year.

So, what are the disadvantages?

Surprisingly few. The shareholders must agree to be personally liable for any income tax not paid by the company. Any tax the company owes must be paid and up-to-date prior to the QC or LAQC status commencing and any company losses must be passed on to shareholders and not carried forward into subsequent years.

For most small New Zealand businesses, the advantages significantly outweigh the disadvantages.

Who should become a QC or LAQC?

These options should be considered by the owners of small to medium-sized business who want to pay themselves tax-free dividends from their company and/or offset company losses against their own personal income for tax purposes.

Undertaking a little research on QCs and LAQCs usually proves worthwhile for most small business owners.

* For copies of the previous articles in this series, email the author at Formations

* Glenn Smith runs a company formation business and is the HomebizBuzz company formations expert. Homebizbuzz offers a free company name check service.