Choosing between operating as a sole trader or a company is one of the most consequential tax decisions a NZ small business owner makes. Each structure has different tax rates, compliance requirements, personal liability exposure, and income-splitting opportunities. This guide covers what actually matters for the decision.
Sole traders pay personal income tax (up to 39%) on all profit. Companies pay 28% on retained profit — but if you take all company profit as salary, you pay personal rates anyway. A company saves meaningful tax only if you can leave profit inside the company or split income with a lower-rate shareholder. Companies have higher compliance costs ($1,000–$3,000/year in accounting fees). Most NZ sole traders benefit from incorporating when profit exceeds $70,000–$100,000.
The Core Tax Difference
| Structure | How profit is taxed |
|---|---|
| Sole trader | All profit taxed at your personal income tax rate (up to 39%) |
| Company | Company pays 28% tax on profit retained in the company |
| Company (salary taken) | Company deducts salary as an expense; you pay personal income tax on it |
| Company (dividend paid) | Company pays 28% first, then shareholders top up to their personal rate via imputation |
The key insight: A company only saves tax on income not taken out as salary. If you extract all profit as salary, the company structure adds cost without tax benefit.
Tax Rate Comparison at Different Income Levels
Sole trader’s effective marginal rates on business profit:
| Annual profit | Sole trader marginal rate | Company rate on retained profit |
|---|---|---|
| $0–$14,000 | 10.5% | 28% (higher!) |
| $14,001–$48,000 | 17.5% | 28% (higher!) |
| $48,001–$70,000 | 30.0% | 28% (slight company advantage) |
| $70,001–$180,000 | 33.0% | 28% (meaningful company advantage) |
| $180,001+ | 39.0% | 28% (significant company advantage) |
Critical observation: For income below ~$48,000, the sole trader pays less tax than a company on retained profit. Company structure only provides a tax rate benefit when profit exceeds ~$48,000.
When a Company Makes Sense
Consider incorporating when:
- Profit consistently exceeds $70,000–$100,000 — the 28% vs 33%+ gap becomes meaningful
- You can retain profits in the company — if you leave money inside the company (e.g., for reinvestment), you save 5–11% on that retained amount
- Income splitting is possible — a spouse/partner who owns shares and is on a lower tax rate can receive dividends taxed at 17.5% instead of 33%+
- Asset protection matters — company limits personal liability (though banks often require personal guarantees for loans)
- Multiple shareholders/investors — company structure allows equity investment; sole trader does not
When Staying as a Sole Trader Makes Sense
Stay as a sole trader if:
- Profit is consistently below $70,000 (personal rates equal or lower than company rate)
- You need to extract all profit for living expenses (no retained earnings possible)
- Compliance costs ($1,500–$4,000/year extra in accounting) would exceed tax savings
- Your business is in early growth with variable income
- You trade in your own name and have minimal liability exposure
The Compliance Cost Reality
| Cost | Sole trader | Company |
|---|---|---|
| Annual accounting fees | $500–$1,500 | $2,000–$5,000 |
| IRD returns | IR3 | IR4 + annual return (Companies Office $46/year) |
| Payroll (if paying yourself salary) | Not required | Required (PAYE filing) |
| Shareholder current account | Not applicable | Required (tracked by accountant) |
| GST | Same for both | Same for both |
The typical extra cost of a company vs sole trader is $1,500–$3,000/year in accounting. At a 5% tax rate difference (28% vs 33%), you need $30,000–$60,000 in retained company profit for the tax saving to outweigh the compliance cost.
Income Splitting — The Hidden Advantage
One significant benefit of a company is the ability to split income with shareholders on lower tax rates:
Example:
- Business profit: $200,000
- Owner’s personal tax rate: 39%
- Spouse’s tax rate (part-time work): 17.5%
As a sole trader: All $200,000 taxed at up to 39% = ~$67,000 tax
As a company with the spouse as a 50% shareholder, dividends split equally: Each receives $100,000 (after company tax) — spouse pays 17.5% top-up rather than 39%.
Important: The spouse must genuinely own shares in the company — no sham arrangements. IRD can challenge income-splitting structures where the underlying work is performed entirely by one person.
Look-Through Companies (LTC) — The Hybrid
An LTC (Look-Through Company) is a company type that passes its income and losses directly to shareholders’ personal returns — like a partnership. This means:
- Losses can offset other personal income (useful in early growth stages)
- No company-level tax — shareholders pay personal rates
- Company legal structure (limited liability) retained
LTCs are popular for small businesses with early-stage losses or mixed income types.
The Decision Checklist
Consider incorporating if you answer yes to 3+ of these:
- Annual profit exceeds $70,000 consistently
- You can leave at least $30,000+ in the company at year end
- You have a partner/spouse who could own shares at a lower tax rate
- You have asset protection concerns (liability, litigation risk)
- You have or plan to take on co-owners/investors
- Your business is growing and you want to attract staff with equity
- Your accountant estimates a company structure saves more than $2,000/year net
Frequently Asked Questions
Can I convert from sole trader to company mid-year?
Yes. You register a company through the Companies Office (companies.govt.nz, $10.22 online), transfer the business assets, and operate as a company from the registration date. Get accounting advice on the transfer to avoid unintended tax consequences.
Do I lose my sole trader tax history when I incorporate?
Yes — the company is a new taxpayer with its own IRD number. Your personal IR3 history stays with you. The company starts fresh.
Can I split income with my children through a company?
Dividends can be paid to shareholders of any age, but the company tax legislation and IRD’s attribution rules limit income splitting that is not commercially legitimate. Payments to minors (under 18) for work may attract personal services attribution rules. Get advice before trying this.