Business mentor: Weigh up options on structure

Q: How do I decide what business structure will suit?

A: Daniel Gill from law firm Chapman Tripp replies:

Whether you've just bought an existing business or started one from scratch, you must decide what form or structure it will have. Each business structure has its advantages and disadvantages - make sure you consult a solicitor and/or tax adviser before making a final decision.

Sole trader

An individual who sets up on his or her own is a sole trader. It is the easiest and least expensive way to operate a business. You simply choose a trading name that is not being used by another business and begin. However, the sole trader is personally liable for any obligations of the business, which means your business creditors can go after your personal assets.

Partnership

A general partnership consists of two or more individuals or other entities who carry on a business together. The partners generally share the management and are personally responsible for the partnership's obligations on a joint basis. Like a sole trader, a partnership is easy to form and operate. No documents are needed and registration is not required. Anyone operating a partnership should formalise the arrangements between partners in writing to avoid misunderstandings.

Company

A New Zealand company is a legal entity created under the Companies Act 1993. It is owned by one or more shareholders and managed by its directors. The main advantage of a company is the liability protection it provides its shareholders. Liability is limited because the company has a separate legal identity and existence entirely distinct from its shareholders. As such, the company is liable for its own debts and can be held liable only to the extent of its assets.

A shareholder is liable for any amount unpaid on a share held by that shareholder and some other limited situations. As well, lenders usually require the shareholders of small, closely held companies to personally guarantee company loans. If you personally guarantee loans, you will have to pay the lender if the company is unable to pay.

Forming a company is more complicated and expensive than setting up as a sole trader or partnership. But it is still relatively simple and can be undertaken by using the Companies Offices website. The structure you choose does not have to be permanent. If the circumstances of a business change, you can get legal advice to help you change its structure.

* Send Mentor questions to: ellen_read@nzherald.co.nz

Answers will be provided by Business in the Community's Business Mentor Programme.


Companies Office website