When to form a company in NZ

Quick answer

A New Zealand company pays tax at a flat 28%, while a sole trader pays personal rates that climb to 39% on income over $180,000. So a company can save tax once you are earning well and reinvesting profit rather than drawing it all out. If you take every dollar as personal income, the company rate rarely helps by itself, because the money is topped up to your personal rate on the way out.

Often the stronger reasons to incorporate are not about tax at all: limited liability, credibility with larger clients, and a cleaner structure for bringing in partners or selling the business later.

The detail, in plain English

As a sole trader, all your business profit is taxed in your name at personal rates. As a company, profit is taxed at 28% inside the company, and you then decide how to extract it, as salary or dividends, which is where the planning lives.

The 28% company rate sits below the 33% and 39% personal bands. If you earn more than you need to live on and leave the surplus in the company to fund growth, that surplus is taxed at 28% rather than 33% or 39%. The catch: when you later pay it out as a dividend, top-up tax brings it up to your personal rate, softened by imputation credits for the company tax already paid. So the real, lasting saving is on profit you retain and reinvest, not on money you spend personally.

Signals that it may be time to form a company:

• Profit is consistently more than you draw, and you are reinvesting the difference.
• The work carries genuine liability risk and you want a barrier between the business and your personal assets.
• Larger clients or government contracts prefer, or require, dealing with a company.
• You plan to bring in a co-owner, raise investment, or eventually sell the business.
• You want to separate business and personal finances cleanly for credit or succession reasons.

Against those sit the running costs: annual financial statements, an IR4 company return, Companies Office filings, a separate bank account, and stricter separation of money. None are huge, but they only earn their keep when there is a real tax or liability reason behind the structure.

A simple example

Tane runs a sole-trader trade business netting around $95,000. He draws the lot to live on. In a company that profit would be taxed at 28% and then topped up to his personal rate as a dividend, leaving him roughly where he started but with more paperwork. For Tane, the case for a company is about liability, given the nature of his work, not tax.

Mia, a consultant, nets $240,000 and only needs $120,000 to live on. The other $120,000 she wants to reinvest in her business. In a company that retained profit is taxed at 28% rather than the 39% she would face personally, freeing up meaningfully more cash to grow. For Mia, incorporating clearly earns its keep, and she will use a salary-and-dividend mix to draw the $120,000 she needs.

Common mistakes to avoid

• Incorporating for the badge. A company adds compliance cost; make sure there is a tax or liability reason behind it.
• Expecting 28% on money you spend personally. Drawn profit ends up taxed at your personal rate via dividends. The saving is on retained profit.
• Forgetting the running costs. Annual accounts, the IR4, the separate bank account and filings all add up.
• Mixing personal and company money. Once you are a company, the line between you and it must stay clean, or overdrawn-account tax issues follow.
• Leaving it too late, or too early. Incorporating mid-year without planning the changeover can create messy split-period returns.

Where this fits in your return

A sole trader files an IR3; a company files an IR4, and you separately file your own IR3 for the salary or dividends you draw. Incorporating brings shareholder salary vs dividend decisions and imputation credit tracking into play, and changes how provisional tax falls between you and the company. The structure you choose shapes years of returns, so it is worth modelling before you commit, not after.

How Fernway can help

We model your numbers both ways, as a sole trader and as a company, including how you would pay yourself, so the decision rests on your actual figures rather than a rule of thumb. If a company makes sense, we set it up cleanly and get Xero, the IR4 and your imputation account sorted from day one. See sole trader vs company and company & trust accounts for more.

This is general information only, current at the time of writing, and not personalised tax advice. Tax rules change and your circumstances may differ, so confirm your position with us or check ird.govt.nz before you act on it.

In plain English: a company helps most when you are earning well and reinvesting profit, or when you want liability protection, not simply because it sounds more official.