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I’m setting up a business – what type of structure should I use?

on Monday, 04 March 2013. Posted in Latest Articles, Business

One of the first decisions you need to make when you decide to set up in business is what legal structure you will use. Generally, the options available to you are to:

  • Form a company under the Companies Act 1993;

  • If you plan to trade on your own, trade personally; or

  • If you are entering business with other people, trade through a partnership.

Trading through a company

If you are setting up or operating a business, you should consider trading through a company. Trading through a company limits your personal liability. Because a company has the ability to act and enter into transactions like a natural person, business obligations are incurred by the company itself. If the company fails to meet those obligations, it will generally be the company itself, rather than the shareholders or directors of the company, who will be liable for those defaults. In contrast, if you operate your business in your personal name, you will be personally liable for all of your business obligations.

Although a company structure limits the personal liability of the owners and managers of the company, some personal liabilities remain. Shareholders are liable to pay for their shares. Directors of a company potentially face greater personal liability than shareholders as they have obligations under the Companies Act 1993 which, if breached, can result in unlimited personal liability. However, provided that they comply with their obligations under the Companies Act, directors do not have personal liability for the obligations of the company.

Trading personally

If you decide not to incorporate a company, you can carry out your business in your own personal name. In this way you can avoid the cost and administration required to form and administer a company. However, if you trade personally, you will have unlimited personal liability for all contracts that you enter into and for any claims made against your business. This can be a significant risk and most businesses therefore operate through a company structure.

Trading in partnership

If you are entering business with others you could consider trading through a partnership. Trading through a partnership is generally similar to trading personally. Partners in most partnerships accept unlimited personal liability for all contracts entered into by the partnership and for any claims made against the partnership business. If you are a partner in a business you therefore become personally liable not only for your own actions but for the actions of your business partners as well.

If you want to become a partner in a business without incurring unlimited personal liability, you may be able to establish a partnership under the Limited Partnerships Act 2008. This Act offers an alternative to a standard partnership by allowing one or more partners to limit their liability. It has been designed to facilitate the development of New Zealand’s venture capital industry by allowing investors to enter partnership arrangements without incurring unlimited personal liability.

Partnerships are generally governed by specific partnership agreements and the Partnership Act 1908. Limited partnerships must have a partnership agreement that meets the requirements of the Limited Partnerships Act 2008.

If you want to enter into business in either a general partnership or a limited partnership,  we can ensure that an appropriate partnership agreement is put in place.

Summary

If you are establishing a new business you need to decide how you will structure your business ownership. You can operate your business through a company or you can trade personally, either alone or in partnership with others. You may also be able to trade as a limited partnership. Although the company structure is the most common ownership structure, we can work with your financial and taxation advisers as they will be able to help you decide what is the most appropriate structure for your business.

 

 

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