Choosing the right business structure is one of the first big decisions you will make when starting out in New Zealand. Whether you are a builder going out on your own, a cleaner picking up residential contracts, or a consultant building a client base, the choice between sole trader and company affects your tax, your liability, and how you run the business day to day. This guide breaks down both options so you can make the call with confidence.
This guide is general information for NZ businesses, not legal, tax or financial advice - check with IRD, the Companies Office or a licensed adviser for your situation.
What is a sole trader?
A sole trader is the simplest business structure in New Zealand. You operate as an individual - there is no separate legal entity. You use your personal IRD number, file an IR3 income tax return each year, and pay income tax at your personal marginal rate. There is no registration fee and no company formation required, which makes it easy to get started quickly.
If you are new to business, the becoming a sole trader guide walks through the practical steps, including what registrations you may need.
The downside is that you and the business are legally the same thing. If the business runs into debt or a customer makes a claim against you, your personal assets - including your home - are on the line.
What is a company?
A company is a separate legal entity registered with the New Zealand Companies Office. It can own property, enter contracts, and take on debt in its own name. As a director and shareholder, you are generally protected from the company's liabilities - your personal assets are not automatically at risk if the business runs into trouble.
Companies pay tax on their profits at the flat rate of 28%, rather than at your personal marginal rate. They must also file annual returns with the Companies Office, prepare financial statements, and meet ongoing reporting obligations. This extra admin comes with the territory.
Sole trader vs company: a comparison
| Factor | Sole trader | Company |
|---|---|---|
| Legal separation | No - you and the business are one | Yes - separate legal entity |
| Personal liability | Unlimited - personal assets at risk | Limited to your shareholding (with exceptions) |
| Tax rate | Personal income tax rates (up to 39%) | 28% flat company tax rate |
| Setup cost | Free - no registration fee | Registration fee applies - check Companies Office |
| Admin burden | Low - annual IR3 return | Higher - annual returns, financial statements |
| Raising investment | Difficult | Easier - can issue shares |
| Credibility | Can feel less formal | Often seen as more established |
| ACC levies | Paid as self-employed person | Paid through company, can vary |
Personal liability
This is often the deciding factor. As a sole trader, you have unlimited personal liability. If a customer sues you, a supplier does not get paid, or something goes wrong on a job, your personal assets are exposed. That includes your savings, your vehicle, and potentially your home.
A company separates your personal finances from the business. If the company cannot pay its debts, creditors generally cannot come after your personal assets - as long as you have acted lawfully and not given personal guarantees. There are exceptions: directors who trade recklessly or sign personal guarantees lose that protection.
Tax
As a sole trader, your business income is taxed at your personal income tax rates - 10.5% up to $14,000, 17.5% up to $48,000, 30% up to $70,000, 33% up to $180,000, and 39% above that. If your business is profitable, you can end up paying more tax as a sole trader than you would through a company.
Companies pay a flat rate of 28% on profits. However, when you pay yourself a salary or dividend from the company, personal tax applies on top of that. The overall tax position depends on your circumstances, so it is worth talking to an accountant before assuming a company will save you money. You can use the contractor take-home pay calculator to get a rough sense of your net position as a contractor.
GST: Both structures may need to register for GST once your turnover exceeds $60,000 in any 12-month period. See GST registration for how this works and when to register voluntarily. Use our free GST calculator to work out GST-inclusive pricing once you're registered.
Setup cost and admin
Setting up as a sole trader is free and fast. You may need to register a trading name if you operate under a name that is not your own, and you will need to notify IRD, but there is no fee for the structure itself.
Registering a company requires paying a registration fee to the Companies Office - check the current amount on their website before you apply. Ongoing compliance includes filing an annual return, keeping financial records, and in some cases getting accounts reviewed by an accountant. This takes time and adds to your costs each year.
Raising money and growth
If you plan to take on investors or bring in business partners, a company is much easier to work with. You can issue shares, bring in new shareholders, and structure ownership clearly. As a sole trader, your business is tied to you personally - you cannot sell a share of it or bring in equity investors in the same way.
Credibility
Some clients - particularly larger businesses, government contracts, or corporate customers - prefer to deal with a company. It can look more established and professional. That said, plenty of highly regarded tradespeople and consultants operate as sole traders, and it is rarely a deal-breaker on its own.
ACC
Both sole traders and companies pay ACC levies, but the way they are calculated differs. As a sole trader, you pay ACC on your personal income as a self-employed person. A company pays ACC on behalf of its working owners and employees. Rates and classifications vary by industry - check ACC's website or speak to your accountant to confirm what applies to your situation.
Liability: why insurance matters even more for sole traders
Because a sole trader has no legal separation between themselves and the business, any claim against the business is a claim against you personally. Your home, your vehicle, your savings - all of it can be exposed if something goes wrong on a job, a customer is injured, or a contract dispute turns into a legal claim.
That makes business insurance especially important when you are operating as a sole trader. Even a relatively minor public liability claim can cost tens of thousands of dollars to defend, let alone settle. Without insurance, you are absorbing that risk entirely out of your own pocket.
A company structure gives you a liability shield, but it is not a substitute for insurance. Directors can still face personal liability in certain situations, and the company itself needs protection from claims. Regardless of your structure, the right cover is a core part of running a business safely in New Zealand.
See also:
- The risks of running a business uninsured
- Public liability insurance for sole traders
- Types of business insurance in NZ
When to switch from sole trader to company
Many people start as sole traders and convert to a company later. Here are the signs it is time to make the switch:
- Your income is consistently high - the 28% company rate may be lower than your personal marginal rate at higher earnings.
- Your personal liability risk is growing - larger contracts, more staff, or higher-value work increase your exposure.
- You want to bring in a business partner or investor - a company makes ownership much cleaner to structure.
- You want to separate business and personal finances - a company requires this by design, which can be good discipline.
- You are pitching for government or corporate contracts - some clients require or strongly prefer a company structure.
If you are just getting started, read how to start a business in NZ for a full overview of what is involved. It is also worth understanding the difference between being a contractor vs employee before you choose your structure, since your employment status can affect which option makes the most sense.
For official information, business.govt.nz and IRD both have clear guidance on business structures and what they mean for your tax obligations.
Frequently asked questions
Can a sole trader have employees?
Yes - a sole trader can hire staff. You will need to register as an employer with IRD, deduct PAYE from wages, and meet your obligations under the Employment Relations Act. Being a sole trader does not limit who you can bring on.
Do I need to register a company to trade under a business name?
No. You can trade under a business name as a sole trader without registering a company. You may need to register the trading name separately, but you do not need to form a company to use one. Check business.govt.nz for guidance on trading names and what registrations apply.
How much does it cost to register a company in New Zealand?
The Companies Office charges a registration fee for online incorporation - check the current amount on the Companies Office website as fees can change. Ongoing costs include the annual return fee and any accountant or legal fees you incur for compliance, so factor those into your decision.
Is a sole trader better for tax?
Not necessarily. If your income is below around $70,000, your personal tax rate may be lower than or similar to the 28% company rate. But at higher incomes, a company can offer a tax advantage - especially if you leave profits in the business rather than paying them out straight away. Talk to an accountant who can model your specific numbers before you decide.
What happens to a sole trader business if the owner dies?
A sole trader business does not automatically continue - it is not a separate legal entity. The business assets and liabilities form part of your estate and are dealt with accordingly. This is one reason why succession planning matters if you are building something you want to sell or pass on. A company can continue to exist independently of its founders, which makes ownership transfer much more straightforward.