There are many business structure options in New Zealand, including companies, partnerships and Trusts, and you want to be sure you are picking the right one. We frequently assist clients who are considering starting a business navigate the different business structure options to find what best suits their needs. The various business structure options each have their own pros and cons. What the best structure is for you will depend on your particular circumstance, desire and purpose.

The simple and easy structure which are well understood, such as a Company or Sole Trader, will work best for most businesses. If you are purpose driven, a Charitable Trust or Incorporated Society may be more appropriate. Increasingly we are also working with clients who want to merge both purpose and profits and for these clients we assist by creating unique dual structure approaches. In this article we have summarised the key points for the most common structures that are used in New Zealand. We are happy to meet and discuss options with you.

Two other critical points before we look at the options:

  • Get your strategy and purpose right before you decide on a legal entity type to use. Each one has positives and negatives so know what your end goal and the impact you want to see is first – after that look at which will help you get there.  They are each just tools for empowering you to have impact.
  • Second, we are offering legal thoughts on key elements of these structures but there are other considerations too – in particular always ensure you get great accounting and tax input on the financial side of these alternatives.

Now turning to the options:

Company
Who Owner = Shareholder
Manager = DirectorThe owners may also be the manager
Liability Is a separate legally recognised entity
Laws The Companies Act 1993 governs companies
Who signs The Director
If things go wrong Companies limit liability for the owner*
Key documents None required.
Can choose to adopt a constitution or shareholders agreement
Visibility Ownership and management is publicly visible on Companies Register
Difficulty to start Moderate

* There are certain limited circumstances when the owners of the company may be liable. If the owners are also managing the company as directors, they are exposed to certain liability as managers.

 

Sole Trader  
Who Owned and managed by ‘sole’ owner
Liability Not separate from entity
Laws No specific law governs sole traders
Who signs The owner
If things go wrong The owner is personally liable
Key documents None required
Visibility Private and not registered
Difficulty to start Easy

 

Partnerships
Who Owner = the Partners
Manager = the Partners manage
Liability Not separate from entity
Laws Partnership Law Act 2019
Who signs Partners
If things go wrong Owners are personally and jointly liable
Key documents None required
Can choose to have a Partnership Agreement
Visibility Private and not registered
Difficulty to start Moderate

* One owner can bind all owners.

 

Limited Partnership
Who Owner = Limited Partner
Manager = General Partner
Liability Is a separate legally recognised entity
Laws Limited Partnership Act 2008
Who signs The General Partner
If things go wrong The General Partner
Limit liability for the owner**
Key documents Requires a Limited Partnership Agreement
Visibility Private for the Limited Partners, public for General Partner
Difficulty to start High

* Each Limited Partner will account for tax in accordance with its individual tax position.

** If the owner participates in the management of the business, they will be liable.

 

Unincorporated Joint Venture
Who Owners = Partners
Management determined by the Joint Venture Agreement
Liability Not separate from entity
Laws Contract law, but no specific law governs Unincorporated Join Venture
Who signs Each partner
If things go wrong Partners separately liable or as decided by the Joint Venture Agreement*
Key documents None required
Can choose to have a Joint Venture Agreement
Visibility Private and not registered
Difficulty to start High

* Owner will account for tax in accordance with its individual tax position.

 

Trading Trust
Who Owner = settlor/donor gives assets (trust fund) to the Trading Trust on trust for the benefit of the beneficiary
Management = the Trustee Company,  manages the trust fund and pass on benefits to the beneficiary
Liability Not separate from entity, creates an equitable relationship
Laws Trusts Act 2019 and Companies Act 1993
Who signs The Trustee Company
If things go wrong The Trustee Company
Key documents Trust Deed
Visibility Private and not registered
Difficulty to start High

 

Charitable Trust
Who Owners = settlor/donor gives property (trust fund) to the Charitable Trust to benefit the community through charitable purposes
Management = Trustees manage the trust fund to advance the charitable purposes
Liability Is a separate legally recognised entity
Laws Trusts Act 2019 and Charitable Trust Act 1957
Who signs The Trustees
If things go wrong The Trustees
Key documents Trust Deed
Visibility Registered on Charitable Trust Register and if a registered charity on Charities Services
Difficulty to start Moderate

 

Incorporated Society 
Who Management = the Committee manages the funds to advance the purpose
Liability Is a separate legally recognised entity
Laws Incorporated Society Act 2022*
Who signs The Committee, but this depends on the Constitution
If things go wrong The Committee
Key documents Constitution
Visibility Registered on Incorporated Societies Register and if a registered charity on Charities Services
Difficulty to start Moderate

* This is a new Act which has recently come into force, for more information on the new Act and requirements see our Incorporated Societies Act 2022: Information Hub.

Co-operatives Companies
Who Owner = Members/shareholders
Governance = Directors
Liability Is a separate legally recognised entity
Laws Co-operative Companies Act 1996 and Companies Act 1993
Who signs The Directors
If things go wrong Companies limit liability for the owners
Key documents Constitution
Visibility Registered on Companies
Difficulty to start Moderate

For lots more information on co-operatives visit Cooperative Business New Zealand – https://nz.coop/

If you would like to discuss or set up the above-mentioned business structure or other commercial matters, you can contact:

What is a Wholesale Investor?

Companies need money, it is the fuel for the engine of their growth.  Very often they will get that money through issuing equity (shares to people who invest) or issuing debt (loans to people who provide finance).  If you do either of these activities you are offering a financial product and captured by the Financial Markets Authority and their rules which state you need to provide extensive disclosure documentation to those investing – unless an exemption applies.

In this article we want to talk about two critical exemptions which we see are commonly used.

Wholesale Investors

A wholesale investor is essentially a person or an organisation with enough previous investing experience that they do not require disclosure documentation. Their experience is often shown by their investment activity, wealth and/or income.  Wholesale investors can be exempted for all offers of financial products or only for some offers of financial products and the critical points to consider if you want to rely on this exemption are:

  • Is the investor an investment business, such as a financial adviser or a licensed insurer
  • Has the investor recently held or acquired financial products of aggregate value of over $1 million
  • What is the investor’s wealth – do their net assets exceed $5 million
  • Is the investor able and willing to certify that they are sufficiently experienced with the particular financial product you are offering
  • Is the investor subscribing for at least $750,000 worth of financial product

Crowdfunding

Another option is crowdfunding – using this exemption, you will have to work with an FMA licenced intermediary to raise the funds.  The licenced intermediary will offer your equity, debt or other financial products to investors for you.  You can use the crowdfunding exception in combination with other exclusions (such as the wholesale investor exclusion above and others which we touch on here), but there is a limit of $2 million in any 12-month period (which includes any ‘small offers’ in that time period).

The FMA has provided a helpful overview of various options and exemptions which you can access here.

We have helped many companies with their capital raising and each situation is unique so feel free to reach out if you would like specific input on your context.

From 16 August 2022, the Fair Trading Amendment Act 2021 will create new obligations that are particularly relevant for small businesses. This is a good opportunity to review your standard form contracts, business practices and policies to ensure you comply.

Unfair Contract Terms

The existing prohibition on unfair contract terms will be extended to include business-to-business contracts valued at up to $250,000 per year.

A term may be unfair where:

  • It would create a significant imbalance in rights between the parties; and
  • The term is not reasonably necessary to protect the legitimate interests of the party relying on it; and
  • One of the parties would suffer detriment (financial or otherwise) if the term was to be relied upon.

A court will also take into account the overall context of the contract and the extent to which the term is transparent.

The new legislation will not apply to contracts entered into before 16 August 2022 (unless renewed or varied from that date onwards). Insurance contracts will be exempt until 1 April 2025.

If a Court declares a term to be unfair, it will be an offence for a party to include, apply, enforce or rely on that term in a small trade contract. The offence is punishable by a fine of up to $200,000 for an individual or up to $600,000 for a body corporate.

If your business uses standard form templates that may be caught by these changes, you should review these to ensure compliance. For assistance with reviewing, please contact:

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Christchurch, 8440, New Zealand

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Hokitika 7810, New Zealand

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Hokitika 7842, New Zealand

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