MYOB Mind your own Business

MYOBMind your own Business ‘Ka mate kāinga tahi ka orakāingarua’ ‘When one home fails, have another to go to. Have two strings to your bow’

Business structures Businesses commonly use one of three business structures: • Sole trader • Partnership • Company.

Sole Trader • Sole trader • If you’re a sole trader, you’re in complete control of your business. The profits are entirely yours, but so are all the responsibilities and liabilities – including any debts your business incurs. • Becoming a sole trader doesn’t require any legal paperwork, which is why many businesses in New Zealand start off as sole traders. • Focus on sole traders.

Partnership • If you’re in a partnership you’ve chosen to pool your assets with others into one business, with the profits and losses of the business divided between you. These types of businesses are established with partnership agreements, which set out in writing the division of profits and losses. • Focus on partnerships.

Companies • A company is a business that is a legal entity in its own right, separate from its shareholders. • This is important because the company owns all its assets and liabilities, which means your responsibilities for any debts are generally limited to the amount you’ve invested as share capital in the business. • Every company in New Zealand has to be incorporated – or registered – with the Companies Office (the national registrar of companies). • Find out more with Focus on companies • Find out more about Business structures.

Definition of a company • A company is defined as a business that is a separate legal entity from the people who have a financial interest in the business, who are known as shareholders and are taxed separately from the company on the income they receive from it. • This is different from sole traders, who are considered – in legal terms – to be their businesses. • There are two types of companies: private and public. Private companies have their shares owned within a private group, like a family for example, so they can retain control. Public companies have their shares publicly listed on the stock exchange so they’re available to be bought by the general public and other companies. • Regardless of whether it’s a private or public company, shareholders have what is called limited liability. This means they can lose the value of their shares in the business, but that’s all. They’re not responsible for any other debts or liabilities the company owes. • 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, so it can last for as long as it remains viable. • To form a company, the business has to be incorporated with the Companies Office, the company register for New Zealand. This registry is a public record of the directors and shareholders of every company in the country. • Find out more with the Companies Office. • Top

Tax requirements for companies • Profits from a company are distributed to shareholders, who are then taxed individually on their overall personal income. • Shareholders can choose to pay tax on their income from the company in the following ways. • Give themselves a salary or wage and either pay PAYE and/or provisional tax to Inland Revenue (as a shareholder and an employee, it is not necessary to deduct PAYE although some “shareholder-employees” will choose to be taxed in this way rather than pay provisional tax). Any salary paid to shareholders should generally be at a fair market rate. • Receive dividends from the company from the profits left over after tax. The dividends are taxed at the shareholders’ tax rates, with a credit allowed to the shareholder for tax already paid by the company on the profits. • Any profits the shareholders don’t take are the company’s and are taxed at the company tax rate, which is currently set at 28 cents out of every dollar. • 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. • 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. • Find out more with Inland Revenue. • Find out more about the Tax implications for different business structures.

Financial reporting for companies • Not all companies are required to file financial documents with the Companies Office to keep their financial information up to date, but all companies have to report their finances to Inland Revenue in an annual tax return. • On this page: • Financial reporting for the Companies Office • Financial reporting for Inland Revenue • Financial reporting for the Companies Office • If your company has ever sought public investment it needs to be reporting its finances at the end of the financial year set by its balance date. However, if you’re unsure if you should be doing this, use the Companies Office financial reporting calculator. • Have your accountant prepare your financial documents – such as your balance sheet and profit and loss statement - for you before they’re audited and filed with the Companies Office at the end of your company’s financial year. Financial statements of any kind always need to be examined in an audit before being filed. • New companies • If you’ve just formed a company, the first balance date must be no later than 15 months after the date of incorporation with the Companies Office. Documents must be prepared within five months and filed within 20 working days. • Non-active companies • Companies that would normally file but have been non-active for the financial year may file a Non-active declaration. • Find out more about financial reporting for the Companies Office.

Financial reporting for Inland Revenue • Many small companies in New Zealand don’t have to file financial statements with the Companies Office. However, it is still necessary to prepare financial statements to allow the company to accurately prepare its tax return with Inland Revenue. In practice, the bank will also usually want to look at a company’s financial statements. • Your company must report its finances to Inland Revenue in an annual tax return containing accurate records of income and expenses as well as a calculation of the tax it needs to pay. These self-assessment tax returns are then verified by Inland Revenue. • Find out more about Filing returns with Inland Revenue. • Your company’s annual tax return is different from the annual return you have to provide the Companies Office which updates the details of your company on the companies register. • Find out more with How to file your annual return. • Depending on the type and size of your company, and the activities it carries out, you might also have to provide other documentation to Inland Revenue throughout the year – such as GST returns and Employer monthly schedules (IR 348). • Find out about GST and Employer deductions. • Most companies employ an accountant or book keeper to manage these filing duties for them. If you don’t have enough experience with accounting to provide accurate and complete returns to Inland Revenue you should do the same. • Record keeping • To provide accurate calculations of your taxable business activity you must keep thorough records. You’re required to do this by law – if your records are too incomplete for you to accurately calculate your income and expenses you could face penalties. • However, it also makes good business sense so you can measure how well you are doing and look at areas for improvement. Also,if you want to sell your business, providing accurate and thorough records to potential buyers can make your business a much more attractive purchase.

GST • GST stands for Goods & Service Tax. It’s a tax built into the price of virtually all products or services you can buy or sell. GST is currently set at 15%. • As a GST-registered business, you collect GST on behalf of the Government by building it into the prices of your products and services, and then you claim GST back on the products or services you’ve bought as business expenses. If you’re not GST-registered, you can’t do this. • So the basic principle of GST is you end up paying Inland Revenue the difference between the GST you collected on what you sold and the GST you paid on the supplies you bought for your business by filing regular GST returns with Inland Revenue throughout the year. Your GST returns will show that you either have GST to pay or you will be receiving a GST refund. • http://www.business.govt.nz/tax-and-reporting/business-tax-levies/an-introduction-to-gst

Asset depreciation • The large majority of assets suffer from wear and tear when used for business purposes which affects their values. This lowering of values is called depreciation. Say, for example, that you bought a new car and sold it a year later. The market value you’d be able to sell the car for would have depreciated in that year to reflect its wear and tear. • If a fixed asset you use in your business has a useful lifespan of more than a year, you should claim depreciation on it to recover the cost of the asset. However, you can’t do with this land or other intangible assets which cannot be depreciated

Consumer laws • Manufacturers and importers • Retailers • Internet traders • Motor vehicle traders • Financial service providers • Understanding the Fair Trading Act • Understanding the Consumer Guarantees Act • http://www.business.govt.nz/laws-and-regulations/the-environment/resource-management-act-for-business

Health and Safety • Health and safety leadership guide • Health and safety systems • Health and safety reporting • Prevent pain and injury • Workplace emergency planning • Crisis management • http://www.business.govt.nz/laws-and-regulations/the-environment/resource-management-act-for-business

MYOB Mind your own Business