Definition of a Company
A company is a legal entity established with a purpose of carrying commercial activities to earn profit. RTC provides professional services to people who aims to legally form their companies in New Zealand. Companies governed by limited liabilities are proven to be the most successful form of business. Limited companies are able to maintain clear relationship between creditors, investors, shareholders and directors.
If you wish to form a company in New Zealand, you must have the following:
- Certificate of Registration must be obtained from the government.
- Your company must have at least one share, one director and one shareholder.
- The company is required to have a registered office address.
- The company is required to have a service address.
- You are also requested to provide communication address.
All New Zealand companies are governed under the Companies Act of 1993. Once legally and officially registered, it is recognized by the law as a legal body and entity. Which means it serves as an “individual” separated from its directors and shareholders. A company, theoretically acts like a person which basically means it can own properties, enter into contractual obligations, be sued and be made liable under the law.
Choosing your company name.
Branding is a very important part of business. Your chosen company name will be the face of your business. This name will be associated with all your legal transactions as an entity. It spreads brand awareness and drive profit as more and more people recognize and utilize your goods and services. It is critical to choose your company name very well. It serves as your brand and trademark.
When you start trading, you are allowed to use a different name aside from your company name. The New Zealand law such as Fair Trading Act of 1986 protects company on confusingly similar names to avoid any confusion.
The government also protects companies and does not allow new businesses to register a name that is too identical or similar to an existing or a reserved one. In making sure that your company details, logos and any other associated identifiers are protected, you may register it to the New Zealand’s Intellectual Property Office.
To sum it up, it is very important to check if your chosen company name is not yet in use.
In making sure that it will not happen:
- You can use our dedicated registry search on this website.
- You may connect with the Intellectual Property Office of New Zealand for any branding issues. For a minimal fee of $22.50, IPONZ can search on the Trade Mark registry in your behalf.
- You may also check online by using Google Search, Yellow Pages and Online Business Directories.
It is very important to choose a company name that will have no legal implication in the future because you will invest in building up your company’s reputation.
In making sure that all of your information will be protected, you may register your trade marks through the Intellectual Property Office of New Zealand website.
Once you have a registered trademark, you can proceed with legal actions with someone who is infringing your copyrights.
Benefits of a Company
A limited company has more advantages than sole-proprietorship or partnership – some are enumerated below.
1. Limitation of Liability
A company is operating as a different entity and your liability as an owner/shareholder is limited only on the number of shares that you own. It basically means that if you own 100 units of $2 shares in the company, your liability for the company debts is up to maximum of $200 only. In sole proprietorship, your liability on all debts incurred will be unlimited. A company gives you more protection in case of losses.
2. Your Company Name/Brand is protected by law
Upon incorporation of your new company. No other individual is allowed to reserve or use a company name that is close or similar to your own registered name. Sole proprietorships have lesser protection when conducting business under a certain brand.
3. Raising Capital through Financing
Companies can expand its business by raising capital and issuing new shares to new shareholders. Companies also have a better chance of loan approvals and bigger credit limits from banks and other financial institutions. An individual will find it hard to apply for personal loans since they will be required to use their own personal properties and possessions as collateral.
4. Employment of Family Members and Taxation
Tax benefits of incorporating a company is also significant. Corporate tax is at a rate of 30% while individual tax can go as high as 38%. By establishing a company, the tax burden can be easily distributed by smart allocation and distribution of income. By hiring family members in your company, it enables income/profit sharing which means it is possible to pay lesser tax. There are instances when individuals reached $60k of income and their additional profits from the company were just taxed at 30%. Companies are also not limited in paying remuneration to family members (as long as it’s not too excessive). However, for sole proprietorship or partnership, you are only allowed to pay your family members’ wage at a fixed hourly rate. Hence, income and profit distribution is very controlled and minimal.
5. Perpetual Ownership
If a shareholder decides to sell or transfer his shares, the company’s continuity will not be affected. This is a total contrast with a sole proprietorship or partnership wherein you will have to fully dissolve your business and make a completely new entity once you give up on the ownership of the business.
Your Obligation as Directors
Directors are required to manage the company on its daily business operations and must not engage in reckless business activities such as “risky trading” that might incur substantial loss to the company.
Company directors must at all times adhere to the two most important rules contained in the Companies Act of 1993:
- The company must always maintain and own more assets than liabilities.
- All due accounts by the company must always be paid regularly and timely.
You can be a director only if…
- You are 18 years old and above.
- You are not bankrupt.
- You are not limited by the law or the New Zealand constitution in becoming one.
- You are a qualified individual pursuant to the company’s by law and constitution.
- You are not prohibited by a property order made under sections 30-31 of the Protection of Personal and Property Rights Act of 1998.
Look through companies (LTC)
What is a Look through company?
The owners of a look-through company (LTC) are liable for income tax on the LTC’s profits, while also being able to offset the LTC’s losses against their other income. They do this by returning their proportion of the income and expenses in their own income tax return.
The look-through treatment does not apply to GST, PAYE, FBT, RWT, RSCT, ESCT or the income tax rules for company amalgamations.
Under the general company law, an LTC retains its corporate obligations and benefits, such as limited liability.
Who can become an LTC?
To become an LTC and maintain LTC status, a company must meet the following criteria for the whole of each income year that they are an LTC:
- It must be a company (ie a body corporate or other entity with a legal existence separate from that of its members)
- It must be a New Zealand tax resident and not treated as a non-resident under any double tax agreement
- All owners must have only look-through interests. There are special requirements for look-through interests depending on when the company is an LTC.
- There must be five or fewer look-through counted owners. Look-through counted owners must be either natural persons or trustees (including corporate trustees). There are special rules for determining the number of look-through counted owners.
- It must not be a flat-owning company.
Additional criteria that apply for the 2017-18 and later income years
- It must not have an owner which is a tax charity or a Māori authority, unless the tax charity or Māori authority are
- If the total ownership interests in the LTC are more than 50% held by foreign LTC holders the LTC must not have a foreign-sourced amount for the year that is more than the greater of $10,000 or 20% of the LTC’s gross income for the year.
The foreign income restriction applies for income years starting on or after 1 April 2017. If the LTC has an owner who is a trustee the trust cannot:
- make a distribution to a company or Māori authority (unless the Māori authority is a grandparented Māori authority) which is directly or indirectly a beneficiary of the trust
- make a distribution of income to a tax charity, unless the tax charity has no control or influence in relation to distributions from the trust or the operation of the LTC
Inland and Revenue Department’s Website – New Zealand https://www.ird.govt.nz/yoursituation-bus/running/accounting-income/ltc-qc/ltc/becoming/what/ltc-becoming-what.html
Income Taxation 101
- receives business income for the goods and services it sells
- can claim business expenses against its business income to arrive at its net profit (the net profit includes drawings taken from the business)
- pays income tax on its net profit.
Tax payable on income
The rate of income tax that a business uses to calculate the tax it needs to pay to Inland Revenue depends on:
- the type of entity you operate as (partnership, company, sole trader, etc.), and
- the income year.
If you are a shareholder of a company, you may also receive tax credits, such as imputation credits attached to dividend income. You can claim these to offset the amount of tax you are liable to pay on that income. For more information about claiming tax credits, see the relevant income tax return guides.
Income tax during your first year in business
- Your first year in business is not tax-free. If, at the end of your first year in business, you have made a profit, you may have to pay tax on this.
- You may choose to make voluntary tax payments during your first year of business, which helps to spread the cost. Some individuals in business, who make voluntary income tax payments during their first year of business, may be entitled to claim an early payment discount.
- If you have not been making tax payments during your first year in business, the tax will need to be paid by 7 February in the following year if you have a 31 March balance date (or, if you have an agent, by 7 April).
- If you want a balance date other than 31 March, you must apply in writing to us stating the reasons why and we will advise you of your new payment dates.
- After your first year in business you may be required to pay income tax in three installments during the year. This is called provisional tax. For more information see our Provisional tax guide IR289.
- If you are a sole trader and have a student loan, you may also have student loan repayments to make. After your first year you may have to pay interim payments. For more information see our Student loans making repayments booklet IR224 or visit our student loans webpage.
Early payment discount
From the income year beginning 1 April 2005, a 6.7% discount of tax has been introduced to encourage individuals who begin receiving self-employed or partnership income to pay tax voluntarily in the year before they begin paying provisional tax.
To qualify, individuals have to:
- Be either self-employed or a partner in a partnership;
- Derive gross income predominantly from a business (not being interest, dividends, royalties, rents or beneficiary income);
- Not be required to pay provisional tax in the income year;
- Make a voluntary payment of income tax before the end of the income year (31 March for a March balance date taxpayer);
- Elect to receive the discount within the timeframe for filing a return of income for that income year;
- Have not been liable to pay provisional tax in the prior four years;
- Have never received an early payment discount (note however that there is a concession to enable taxpayers to claim the discount again where they have ceased to receive self-employed or partnership income for a period of four years and then begin a new business).
The discount is calculated at the rate of 6.7% on the lesser of the amount paid during the year or 105% of the end-of-year residual income tax liability.
To find out whether you might qualify for the discount, please contact Inland Revenue.
Inland and Revenue Department’s Website – New Zealand https://www.ird.govt.nz/business-income-tax/bit-incometax-basics.html
Company Registered Address
All incorporated companies in New Zealand are required by the law to have a registered office address.
The company registered address must be a physical address located anywhere across New Zealand and must store the following documents for inspection purposes:
- Company by-law/constitution.
- Share register and register of directors’ interests.
- Minutes of all the meetings and resolutions (directors, shareholders, committees).
- All necessary company certificates.
- Particulars (full names and addresses) of all the current company directors.
- All written communications and agreements to all the shareholders.
- Financial records/statements.
- All the records for the past seven years must be kept and available for inspection.
If you need a company physical address, we can connect you to our partner provider and they will set you up a legal and compliant physical address and valid mail facility.
If you’d like to know more about this service, you can send us an email at ________@____.com and we will get back to you shortly.
Company staff employment
You must be aware of your tax responsibilities in hiring staff for the first time for your newly registered company. Inland Revenue provides a comprehensive set of rules about paying correct taxes and making necessary salary deductions from your employee’s salary.
Becoming an employer
When you start employing staff, you must register with Inland Revenue as an employer. You must also decide whether your staff are employees or self-employed contractors as the tax treatment for each is different.
For tax and accident compensation purposes, you must decide whether the people who work for you are employees or self-employed contractors. It is important to note that a person can be self-employed in one line of work and still work for someone else as an employee.
There are things you must do or check when a staff member starts or stops working for you, when your business changes or ceases or if you want to employ your spouse or any foreign workers.
Employers must deduct PAYE, including tax on schedular payments (formerly withholding payments) from payments made to staff or contractors. Deductions may also be needed for student loan repayments, child support, KiwiSaver, or any benefits, bonuses or other allowances that you pay.
You must keep:
- wagebook information
- copies of PAYE payment information
- Tax code declaration (IR330) forms completed by employees
- Tax rate notification for contractors (IR330C) forms completed by contractors
- letters from us requesting you change your employee’s tax code
- letters from us requesting you change a contractor’s tax rate
- a copy of any written agreements to treat a payment to a contractor as a voluntary schedular payment from which you make a deduction
- copies of certificate of exemptions
- copies of special tax codes
- copies of special tax rate certificates.
All your pay records must be held in New Zealand for at least seven years.
Filing returns and making payments
Filing and payment responsibilities for salary and wage deductions differ depending on your gross annual PAYE (including ESCT) payments.
Failing to meet your employer obligations
If you fail to meet any of your obligations as an employer you may be liable for penalties and interest.
Inland and Revenue Department’s Website – New Zealand https://www.ird.govt.nz/payroll-employers/
Training, Support and External Links
If you need further understanding on how to grow your business, you may refer to the following useful resources below:
For trainings and support provided by the New Zealand government, you may visit: https://www.nzte.govt.nz
If you wish to talk to a Biz advisor, you may visit:
For all information regarding taxation:
If you need further assistance, we are always here to help. You may send us an email at _______@___.com and we will get back to you shortly.