Sole trader, company, or look-through company: the structure you choose shapes your tax rate, your personal liability, and how much admin you carry. Here is how the three compare in New Zealand, and the kind of owner each one suits.
The three structures at a glance
New Zealand small businesses usually sit in one of three structures. They look similar from the outside but behave very differently for tax and risk.
| Structure | What it is | Who owns the income |
|---|---|---|
| Sole trader | You, trading under your own IRD number. No separate legal entity. | You personally. Profit is your income. |
| Company | A separate legal entity you own shares in. | The company. It pays you a salary or dividends. |
| Look-through company (LTC) | A company that elects to be 'looked through' for tax. | The shareholders, in their proportions, as if they earned it directly. |
The sole trader is the simplest and most common starting point. The company adds a legal shield and a flat tax rate. The LTC is a hybrid: company structure on the outside, but profits and (importantly) losses flow through to owners' personal returns.
Tax treatment compared
This is where the three diverge most.
- Sole trader: profit is taxed at your personal marginal rates, which step up as income rises. There is no separation between you and the business, so a good year can push you into higher brackets.
- Company: profit is taxed at the flat company rate of 28%. You then take money out as a shareholder salary (taxed at your personal rate) or as dividends, which carry imputation credits for the tax the company already paid, so the income is not taxed twice.
- LTC: there is no company-level tax. Profit, and losses, pass through to shareholders at their personal marginal rates, similar to a sole trader but inside a company shell.
The headline takeaway: at higher profit levels, the 28% company rate can be lower than top personal rates, which is one reason established businesses incorporate. But the saving only crystallises if you genuinely leave profit in the company rather than drawing it all out, where it gets taxed again at your personal rate.
It is worth being clear about a common misconception: the 28% company rate is not a discount you simply pocket. If you take all the profit out as salary or dividends, it ends up taxed at your personal rate anyway. The genuine benefit appears when you can leave profit inside the company, to reinvest, build a buffer, or smooth income across years, where it is taxed once at 28% until you draw it. For a business that distributes every dollar each year, the rate advantage largely disappears.
Liability and risk
Tax is only half the story. Liability often decides the structure.
- Sole trader: no legal separation. If the business owes money or is sued, your personal assets are exposed.
- Company: a separate legal person. In general your risk is limited to what you put in, though directors can still be personally liable in cases such as reckless trading or personal guarantees on loans.
- LTC: keeps the company's limited-liability shell, while still passing profits and losses to owners for tax. You get the legal separation of a company with the tax flow-through of a sole trader.
If your work carries real financial risk, signing big contracts, holding stock, employing people, the limited liability of a company or LTC is often the deciding factor regardless of the tax maths.
Compliance cost
More protection and more tax planning come with more paperwork.
| Structure | Typical compliance |
|---|---|
| Sole trader | An IR3 personal return. Lightest admin, lowest accounting cost. |
| Company | Annual financial statements, an IR4 company return, Companies Office filings, and shareholder records. Highest admin. |
| LTC | Company-level filings plus the look-through calculations that allocate results to shareholders. Middle to high. |
For a small, low-risk operation, the company's extra cost can outweigh the tax benefit. As profit and risk grow, the calculus flips. The right answer is the point where protection and tax saving justify the admin, and that point is different for every business.
Which suits which owner
As a general guide:
- Sole trader suits people starting out, side-businesses, and low-risk service work where simplicity matters most.
- Company suits established, profitable businesses that want limited liability, plan to retain profit, or expect to bring in partners or investors.
- LTC suits owners who want a company's legal shield but expect early-stage losses they would like to use against their other income, a common fit for some property and start-up situations.
None of these is permanent. Many businesses start as a sole trader and incorporate once profit and risk justify it. The trick is changing at the right time, not too early (paying for admin you do not need) and not too late (carrying personal risk you should have shed).
A worked example shows the logic. A contractor making a modest profit and carrying little risk is usually best as a sole trader: simple, cheap, and taxed at personal rates that may be lower than 28% anyway. The same contractor, three years later, making strong profit, signing larger contracts, and wanting to retain some earnings, often has a clear case to incorporate. Nothing about the work changed; the numbers and the risk did.
Talk it through with us
The right structure depends on your numbers, your risk, and where you are heading, which is exactly the kind of thing a short conversation settles quickly. We will look at your profit, your liability exposure, and your plans, then tell you in plain English which structure fits and when to switch if you are in the wrong one.
Book a free 20-minute review and we will work through it with you. No jargon, fixed fees, no obligation.
This is general information only, current at the time of writing, and not personalised tax advice. Your situation may differ. Confirm the detail with us or check ird.govt.nz before you act.
In plain English: sole trader is simplest, a company gives you a flat 28% rate and limited liability for more admin, and an LTC blends the two by passing profits and losses to you while keeping the company shell.
This is general information, not personalised tax advice.See our full disclaimer.