What is the difference between a sole trader and a company?

Looking to start a business but don't know what entity structure to implement? 

There are in fact 4 different types of entity structures you may choose to trade under (not including non profit organisations or clubs).

They are:

• Sole Trader
• Partnership
• Company
• Trust

Sole Trader

A sole trader is a business owned and operated by an individual. There is no legal distinction between the owner and the business, meaning the owner is personally liable for all debts and obligations.

The advantages are simplicity and control: setup and running costs are low, the owner keeps all profits, and decision-making is entirely their own.

Sole traders report business income on their personal income tax return. In New Zealand, individuals pay progressive income tax rates ranging from 10.5% to 39% on taxable income, and all business profits are taxed at these rates. Sole traders are also responsible for ACC levies, which fund New Zealand’s accident compensation scheme.

Partnership

A partnership is a business operated by two or more people. Standard partnerships in New Zealand are not separate legal entities, so partners are jointly and personally liable for the partnership’s debts and obligations.

Partnerships allow owners to pool resources, expertise, and capital, and profits are allocated to each partner for taxation, avoiding corporate tax.

While there is no legal requirement to have a written partnership agreement, it is highly recommended. A formal agreement should outline partners’ contributions, profit-sharing arrangements, decision-making authority, and procedures for adding or removing partners or handling a partner’s exit.

Setup costs are relatively low, though slightly higher than for a sole trader. Each partner reports their share of the partnership’s profits or losses on their individual tax return.

Company

A company is a separate legal entity from its shareholders. Ownership is determined by the issuance of shares, and shareholders’ liability is generally limited to the amount unpaid on their shares, protecting personal assets beyond the investment in the company.

Companies in New Zealand must register with the Companies Office and comply with ongoing reporting obligations, including annual returns and maintaining proper records of directors, shareholders, and company activity.

Companies pay corporate tax on their profits (currently 28%), which is separate from the personal tax paid by shareholders on dividends. One advantage of a company is that ownership can be transferred easily through the sale or assignment of shares, without affecting the company’s ongoing operations. This makes companies suitable for raising capital, attracting investors, or succession planning.

Trust

A trust is a legal arrangement where a trustee holds property or assets for the benefit of beneficiaries, under a trust deed. While not a separate legal entity, a trust is considered a taxable entity and must usually file a trust tax return with the Inland Revenue Department (IRD).

Trustees can be individuals or a corporate trustee. Trusts are commonly used in New Zealand for family businesses, estate planning, and asset protection. Types include discretionary trusts, unit trusts, and hybrid trusts, each with specific rules and tax implications.

Trust income may be taxed in the hands of the trust or allocated to beneficiaries, who then report it on their personal tax returns. Trusts can be complex to establish and maintain, often requiring professional legal and tax advice.