Forming a company in New Zealand

If you’re thinking of starting a business in New Zealand, you might want to consider setting up a company. It’s the most common entity for a few good reasons…

Limited liability

With a company structure, you get limited liability, which means your personal assets are separate from your business liabilities. That way, your investment is protected against financial risks. For example, if you started a business as a sole proprietor and the business struggled and accrued debts, you would be personally liable to use personal savings or risk personal assets being seized.

Succession

A company’s existence is not affected by changes in ownership, such as the unfortunate passing of shareholders. This means that a business can keep running smoothly no matter what changes come along. Any shareholding changes other than via succession need to be considered as they can affect the ability to carry forward losses and pay future dividends.

Access to Capital

Companies can raise funds for their growth, expansion, or development by issuing shares to investors. This is an excellent way for them to gather the necessary capital instead of other business structures.

Credibility and trust

Whether you want to impress your customers, suppliers, or potential collaborators, having a registered company status is a sign of professionalism and reliability, which helps you build a positive reputation in the marketplace.

Tax benefits

Company profits are taxed at a separate rate (currently 28%), but shareholders receive credits for taxes paid by the company. It often results in distributed profits being taxed at shareholders’ marginal rates, potentially giving them some tax advantages.

Ownership and control

Companies provide a clear framework for ownership and control through shares and a board of directors or shareholders, which benefits businesses with multiple stakeholders.

In the future, you might consider issuing shares to your employees so they can have a share of ownership and dividend income without voting rights. For startups, it’s advisable to appoint an independent director as a mentor, while companies with multiple shareholders may want to nominate a director who can represent their interests.

The name game

So, you’ve decided that a company is right for you, and now you need to name it. You need to ensure the name is easy to pronounce so that people can remember it. Word of mouth is powerful; you don’t want it to spread around incorrectly. It’s also important that it’s easy to spell, as this will make it easier for people to find your company online. Lastly, be careful about using family or shareholder names – because who knows what could happen – you might want to one day sell the company. The companies register is a great tool to check what names are available.

Incorporating a company

To begin incorporating your company, you’ll need to head to the companies office here. You will need a RealMe login to proceed, so if you haven’t already got one, click ‘create a RealMe’ on the same link above, and follow the prompts. Next, you’ll ‘reserve’ your company name if you haven’t done so already.

The information you will need to be prepared with is:

• Name of Company
• How many shares
• Shareholder(s) and how many shares each shareholder owns
• Director(s)
• Constitution if you don’t wish the default to apply

Each shareholder and director must provide their IRD number, current address, date of birth and place of birth. If an overseas shareholder owns more than 25% of the company, then more information will be required in line with AML. If a Trust is the shareholder, it is the Trustees of the Trust that will own the shares jointly, not the Trust.

When incorporating a company, you can register for an IRD number and GST simultaneously, which is particularly useful if you anticipate a turnover exceeding $60,000 within the next 12 months.

They will ask you some simple questions to help determine your business industry code, whether you have a tax agent who can give you an extension of time to file your tax returns and the frequency of your GST payments.

You can choose whether your company should be treated as an LTC (Look Through Company) for income tax purposes. In this case, the company would be treated like a partnership, and any income or loss would be attributed to shareholders based on their shareholding. This means the losses can be offset against other income, except for ring-fenced losses from residential rental. Additionally, any capital reserves can be paid out without requiring the company to be liquidated.

Once the business is running…

It doesn’t end there. You will need to file an annual return to keep the company current and be responsible for updating things such as addresses and changes of shareholders.

If you don’t file your return, the company can be struck off the register – if the company is still operating it takes a lot of time and effort to restore the company.

Check out this link that will help with your decision-making. It gives you a great overview of a company and what it means to be a shareholder and director, as it is important to understand your duties and liabilities.

If forming a company and the annual obligations come under the too-hard basket, you can ask your accountant/tax agent to incorporate the company and file your annual returns each year. Many questions will pop up along the way, so feel free to send me an email or give me a call.