Side by side
| Sole trader | Limited company | |
|---|---|---|
| Setup cost | Nothing | Companies Office incorporation fee, plus any adviser costs |
| Ongoing admin | One IR3 a year | Annual return, company tax return, shareholder records, minutes |
| Personal liability | Unlimited | Generally limited to what you put in, but see below |
| Tax | Personal rates, 10.5% to 39% | Flat company rate on profits, then tax again when paid to you |
| Losses | Can usually offset other personal income | Trapped in the company until it profits |
| Privacy | Your details are not on a public register | Directors' names and addresses are public |
| Raising money | Hard: no shares to sell | Shares make investment possible |
| Winding up | Just stop | Formal removal or liquidation process |
Liability: the real difference
This is the reason most people incorporate, and it is a genuine one. A company is a separate legal person, so its debts are generally its own.
But the protection is not absolute, and new business owners often overestimate it:
- Personal guarantees undo it. Banks, landlords and major suppliers routinely require directors to personally guarantee the company's obligations. Sign one and you are personally on the hook anyway.
- Director duties still apply. Trading recklessly or while insolvent can make a director personally liable.
- Your own negligence can still follow you personally in some circumstances.
- Unpaid PAYE and GST attract particular attention from IRD.
For most one-person businesses, appropriate public liability or professional indemnity cover reduces real-world risk more than incorporating does, and costs less. See the insurance guide.
Tax: usually not the reason
People often assume a company saves tax. Sometimes it does, often it does not, and it depends on what you do with the profit.
As a sole trader, all profit is taxed at your personal marginal rates as you earn it. In a company, profit is taxed at the company rate, but when you take that money out as a shareholder salary or dividend it is taxed in your hands too. The imputation credit system exists precisely to stop the same profit being taxed twice, which means the total tax on money you actually spend ends up broadly similar.
Where a company can genuinely help is when profit stays in the business (funding stock, equipment or growth) rather than being drawn out. Where sole trading helps is early on: business losses can usually be offset against other personal income, such as a salary you still earn.
This is the one decision where paid advice reliably pays for itself. An accountant will model both structures against your actual numbers in far less time than you would spend guessing.
Credibility and clients
Some corporate and government buyers prefer or require a company. Some procurement systems are simply built around company records. If your target clients are large organisations, ask them before you decide.
For everyone else, the credibility signals that actually matter day to day are smaller and cheaper than incorporation:
- An email address on your own domain rather than a free webmail account.
- A tidy, correctly formatted invoice with your GST number on it.
- Clear written terms of trade.
- Turning up when you said you would.
The first one costs a few dollars a month and takes ten minutes. Here is how it works.
Signs it is time to switch
Stay a sole trader if
- Your work carries low risk of harming others financially or physically
- Your clients are individuals or small businesses
- You are still testing the idea
- You want the lowest possible admin load
- You are running early losses against other income
- You value keeping your details off a public register
Consider a company if
- You sign significant contracts, leases or supply agreements
- Your work could cause expensive damage or loss
- Corporate or government clients require it
- You are bringing in a partner or investor
- You are retaining profit in the business to grow
- You are employing several staff
How switching actually works
It is a real transition, not a form. In outline you incorporate the company with the Companies Office, transfer the business assets to it, tell IRD and register the company for GST if needed, open new bank accounts, novate or reissue contracts, and update ACC.
The thing that makes this painless or painful is your identity. If your email is jane.plumbing@gmail.com you will be telling customers about a new address for years. If it is jane@janeplumbing.co.nz, nothing about how people reach you changes at all: the domain moves with you, whatever the structure behind it.