Different Ownership Structures –
Advantages and Disadvantages

There are several different ownership structures that can be used to capture your business activities.

Each has it’s own pro’s and con’s – advantages and disadvantages. The right structure for you will depend on many things such as what type of business you are running and what level of protection you require for your personal assets. For example, a company structure is more complex and expensive to maintain than a Sole Trader however, it offers more protection for your personal assets.

Each structure also has it’s own legal and financial obligations. In New Zealand, we most commonly operate under Sole Trader, Partnership and Company structures.

Read our summary of the advantages and disadvantages below…

It is beneficial to set yourself with up the most appropriate structure from the beginning to minimise administration and compliance costs. We can help.

We outline the general differences below between Sole Trader, Partnership, Company and Trust below in order to give you an introduction and overview.

If you would like to discuss your options further, please feel free to get in touch. We’ll be happy to chat, and your first appointment is free!

Different Ownership Structures

Different Ownership Structures – Advantages and Disadvantages

Sole Trader

Advantages
Losses (if any) are easily used
Simple and inexpensive to set up
Private use of business expenses/assets eg car adjusted on cost (lower than market or Fringe Benefit Tax calc). Same applies to partnerships

Disadvantages
Blocks tax minimisation, cannot easily split profit with spouse/partner
Lack of protection from creditors
Before paying wages to spouse/partner you need to obtain IRD permission in writing.

Partnership

Advantages
Losses are easily accessed
Simple & Inexpensive to set up
Simple, suits husband and wife
Useful where creditor protection not required

Disadvantages
Allows some income splitting
One partner can be liable for the other’s debts
Lack of protection from creditors
Useful where creditor protection not required

Company

Advantages
Income splitting with family may be possible – salary, dividends, interest
Liability limited to company assets.
Ideal where protection is required
May be able to avoid giving or limit giving your personal guarantee
Your funds loaned to the business can be protected by way of a registered security – see your lawyer
With a Look Through Company (LTC) shareholders can claim the company’s tax losses.
Company shares can be held by Trust for creditor protection

Disadvantages
Higher cost of accounting than Partnership
Need for statutory registers and Companies Act compliance.
Company tax rate at 28% but can route income to individuals if at lower rates or retain in company if on higher rates. Watch Attribution Rules.
Imputation credits on dividends: Recipients on low tax rates may be denied refunds. They will need “other” income to utilise Imputation credits
For an LTC, shareholders must guarantee any income tax will be paid.
Private use “paid” via FBT on market price, or private use percentage.

Trust

Advantages
Tax savings can be substantial if trust income is expected to be high
Very flexible for income and asset protection eg: lease assets to company
Can protect family members
Testamentary Trust may be able to protect “inheritance” from government asset testing
Watch deemed settlors for tax
Must distribute annual income by 30/9/xx unless Trust Deed permits distribution up to 12 months after balance date

Disadvantages
Losses locked in – not accessible to individuals
Trust Deed – customised to suit specific needs
Possible conflict of interest between settlor and trustees. Must select trustees carefully
Young beneficiaries watch high tax on distribution if under 16 years of age.
Watch deemed settlors for tax
Must distribute annual income by 30/9/xx unless Trust Deed permits distribution up to 12 months after balance date

Ready to get started? Give us a call.

Arrange an appointment so we can help ensure you choose the most appropriate structure right from the beginning.

This will save you time and money in the long run and ensure that you minimise your tax obligations.