Companies

A company is defined as a business that is a separate legal entity from the people who have a financial interest in the business, known as shareholders and are taxed separately from the company on the income they receive from it. It is necessary to appoint directors (who can be the shareholders) who will effectively run the company.

As the company is a separate entity, it owns all the assets and all the liabilities itself. This separation also means the company is not tied to one individual or one generation of owners.


Shareholders can choose to pay tax on their income from the company in the following ways.

If the company makes losses, the losses are retained by the company and they cannot be offset against the shareholders’ other income for tax purposes.

Look Through Companies
Companies that meet certain requirements (eg five or fewer shareholders) can make an election with Inland Revenue to become a “look through company”. This means they will be taxed like sole traders or partnerships, so tax is paid by the shareholders on the company profits at the shareholders’ tax rates. Any losses can be allocated to shareholders to reduce their overall tax liability or the LTC can carry them forward. This is often a good option for owing rental property if it is making losses.


Advantages


The main advantage of operating as a company is that you have limited liability whereas if you are operating as a sole trader or a patnership you are personally responsible for any debts that may be incurred.

However banks almost exclusively ask for personal guarantees when loaning funds to a company which negates the limited liability.


Continuity
A company can continue to operate indefinitely, as the assets of the business do not need to be sold when the shareholders want to exit. They can instead get an independent share valuation done and sell the shares to other interested parties.

Tax Rates
The income tax rate in a company is presently set at 28%. This is lower than the top personal tax rate and provided a market rate salary has been paid to the shareholders it is possible to leave profits in the company to be taxed at a lower rate.


Disadvantages


It is more expensive to set up a company, as there is an incorporation fee payable to the Companies Office and each year a company must file an annual return.


A company is a separate legal entity and is governed by the Companies Act 1993. There are substantially more legal requirements to follow than for a partnership or a sole-trader.

Detailed financial statements must be prepared each year, so the accounting fee will be higher than for other types of entities.

Directors (once elected) can be liable for prosecution if they allow a company to trade while it is insolvent.

If you are interested in trading as a company please call and discuss this with one of the Accounting team so we can go over the options with you. We are able to incorporate the company, and apply for the IRD and GST number.

 

 

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CHARTERED ACCOUNTANTS
Richmond, Nelson.