Sole trader vs company (NZ tax)

Quick answer

A sole trader and a company are taxed in genuinely different ways, and neither is automatically better. As a sole trader, your business profit is simply added to your personal income and taxed at your marginal rate, which rises in steps up to 39% on income above the top threshold. A company pays a flat 28% on its taxable profit, but you still pay tax personally when you take money out as a salary or dividend.

For many small operators earning modest profit, staying a sole trader is simpler and just as tax-efficient. The company structure tends to earn its keep once profits are higher, you want to retain earnings in the business, or you need the liability protection of a separate legal entity. The honest answer for most people is: it depends on the numbers, and it is worth running them before you incorporate.

The detail, in plain English

As a sole trader there is no legal line between you and the business. You file an IR3, your profit is taxed at the individual rates, and you and the business share one bank balance and one set of debts. It is cheap to run, fast to set up, and the compliance is light.

A company is a separate legal person. It files its own IR4 return, pays 28% company tax on profit, and keeps its own accounts. You become a shareholder and usually a director, and money reaches you through a shareholder salary, a dividend, or a current-account drawing, each with its own tax treatment.

Here is how the two compare on the points that matter most:

The 28% company rate looks attractive next to a 33% or 39% personal rate, but it is not a free saving. When the company pays profit out to you as a dividend, the gap between 28% and your personal rate is topped up, with imputation credits passing on the tax the company already paid. The real benefit shows up when you leave profit inside the company to grow rather than drawing it all out.

A simple example

Say your business makes $80,000 of profit and you need to live on all of it.

• As a sole trader: the whole $80,000 is taxed at your personal rates. You pay one set of tax, file one IR3, and that is the end of it.
• As a company that pays it all out to you: the company pays 28%, then the remaining profit comes to you as a salary or dividend that is taxed at your personal rate, with credit for the tax the company already paid. Because you draw the lot, the overall tax lands close to the sole-trader figure, but you have carried the cost of an extra return and a set of company accounts.

Now change one thing: you only need $55,000 to live on and want to reinvest the other $25,000 in stock or equipment. The company can retain that $25,000 taxed at just 28%, where a sole trader would have paid their top personal rate on it this year. That is the situation where incorporating genuinely helps.

Common mistakes to avoid

• Incorporating purely to chase the 28% rate. If you draw all the profit anyway, the saving largely disappears and you have added cost and admin.
• Treating the company bank account as your own. Money you take out personally is a shareholder drawing that has to be accounted for. Mixing funds creates an overdrawn current account and a tax headache.
• Forgetting the extra compliance. A company means annual financial statements, an IR4, and Companies Office filings. Budget for that before you switch.
• Ignoring liability when it actually matters. If your work carries real financial or contractual risk, the limited-liability protection of a company can be worth more than any tax difference.

Where this fits in your return

If you stay a sole trader, your business result flows straight onto your IR3 alongside any other income, and your tax (including any move into provisional tax) is worked out from there.

If you form a company, the business profit sits on the company's IR4 at 28%, and your personal IR3 only picks up what you actually drew as salary or dividend. The two returns talk to each other through imputation credits, which is why getting the salary-versus-dividend mix right each year is part of the planning, not an afterthought.

How Fernway can help

We can model both structures on your real numbers, show you the tax difference side by side, and tell you plainly whether incorporating is worth it for you, or whether you are better off staying simple. If a company does make sense, we handle the setup, the Xero file, and both returns so nothing slips.

This is general information only, not personalised tax advice. Your situation may differ, so book a free 20-minute review and we will run your numbers properly.

In plain English: stay a sole trader while it is simple and the profit is modest; consider a company once you are earning more or want to reinvest, and run the numbers before you decide.