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Structures for Business- Which is Best for You?

Business, Commercial

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 have any further queries please do not hesitate to contact one of our experts at Parry Field Lawyers- stevenmoe@parryfield.com, yangsu@parryfield.com, sophietremewan@parryfield.com, michaelbelay@parryfield.com or annemariemora@parryfield.com

This article is general in nature and is not a substitute for legal advice. You should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source. 

https://www.parryfield.com/wp-content/uploads/2022/08/mark-fletcher-brown-nN5L5GXKFz8-unsplash-scaled.jpg 1707 2560 Tasha Fraser https://www.parryfield.com/wp-content/uploads/2019/07/Parry-Field-Lawyers-Logo.png Tasha Fraser2022-08-29 13:56:282024-08-06 13:12:46Structures for Business- Which is Best for You?

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