What's the difference between a sole trader and a company?
When you're running your own business in New Zealand, the two most common structures are sole trader and limited liability company. Here's how they compare.
Sole Trader
A sole trader is the simplest structure. You run the business in your own name, using your personal IRD number. There's no separate legal entity — you are the business.
- Tax return: You file an IR3 individual income tax return each year
- Tax rate: You pay personal income tax rates on your net profit (up to 39% at the top rate)
- Liability: You are personally responsible for all business debts
- Setup: No registration required — just let IRD know you're self-employed
- Admin: Minimal ongoing compliance
Limited Company (Ltd)
A company is a separate legal entity, distinct from its owners (shareholders). It must be registered with the New Zealand Companies Office.
- Tax return: The company files its own IR4 return each year
- Tax rate: A flat 28% company tax rate on net profit
- Liability: Shareholders are generally only liable up to the value of their shares
- Setup: Must register at companies.govt.nz — requires directors, shareholders, and a registered office
- Admin: Annual returns, financial statements, and director obligations apply
Which is right for you?
If you're just starting out and keeping things simple, sole trader is the easiest option. As your income grows — particularly past the top personal tax threshold — incorporating as a company may offer tax advantages. A company also looks more credible to clients and makes it easier to bring in investors or business partners.
We recommend speaking with an accountant before making the switch. Lodg is here to help sole traders with their tax — if you're considering incorporating, get in touch and we can point you in the right direction.
Source: ird.govt.nz | business.govt.nz