One of the first questions we get from new clients — especially couples going into business together — is deceptively simple: "should we operate as a sole trader, or set up a company?" It sounds like a formality, something to tick off before the real work of running the business begins. In practice, it's one of the few decisions early on that genuinely shapes how much tax you pay, how exposed your personal assets are, and how much admin lands on your desk every month.
There's no universally "right" answer. The best structure depends on what the business does, how much risk it carries, how much money is likely to move through it, and what your long-term plans are. What follows is a practical way to think through the decision, rather than a generic list of pros and cons.
What Each Structure Actually Is
A sole trader structure means you (or you and your spouse/ partner, as individuals) are the business. There's no legal separation between you and it. You trade under your own name or a registered trading name, you invoice clients directly, and any profit the business makes is simply added to your personal income for tax purposes. It's the default structure in New Zealand because there's nothing to set up — if you start selling a product or service tomorrow without registering anything, you're already a sole trader.
A company, by contrast, is a separate legal entity. You register it with the Companies Office, it gets its own IRD number, and it can own assets, sign contracts, employ staff, and be sued, entirely separately from you as an individual. You and your spouse/ partner would typically be both directors (running it) and shareholders (owning it), but legally, the company is its own thing. Profit belongs to the company first; you then pay yourselves out of it, either as a salary, a shareholder salary, or dividends.
That distinction — separate legal entity versus no separation at all — is the root of almost every practical difference between the two.
The Liability Question Comes First
Because a sole trader has no legal separation from the business, there is no shield between business debts and personal assets. If the business can't pay a supplier, gets sued, or takes on debt it can't service, creditors can pursue your personal assets — savings, the family car, potentially the house, depending on how it's owned and whether there's a relationship property agreement in place. For a low-risk business — say, freelance graphic design or bookkeeping from home — this risk is often manageable. For a business that involves contracts with large suppliers, physical products, employees, or anything where a mistake could cause real financial harm to a third party, that exposure becomes a much bigger consideration.
A company limits this. Because the company is its own legal person, its debts are generally its own debts, not yours personally. Your risk as a shareholder is usually limited to what you've invested in the company. This is genuinely the main reason most small business owners set up a company rather than trade as sole traders — not tax, not prestige, but the wall it puts between business risk and personal assets.
It's worth being honest about the limits of this protection, though. Banks and larger suppliers will often ask directors of a new company to give a personal guarantee before extending credit, which quietly removes some of that protection for that specific debt. And directors can still be held personally liable if they trade recklessly, breach their duties under the Companies Act, or don't meet PAYE and GST obligations. A company reduces risk; it doesn't eliminate it.
Tax Is Rarely the Deciding Factor Alone, But It Matters
As a sole trader, business profit is taxed at your personal income tax rates, which in New Zealand step up as income rises — 10.5%, then 17.5%, 30%, 33%, and 39% at the top bracket. If you and your spouse/ partner are both working in the business as sole traders (or as a partnership between you), profit gets split according to your partnership or ownership share, and each of you pays tax on your portion at your own personal rate.
A company pays a flat rate of 28% on its profits, regardless of how much it earns. If the business is generating profit well above what you personally need to draw out to live on, this flat rate can be a real advantage — profit retained in the company for reinvestment is taxed at 28% rather than climbing into the 33% or 39% personal brackets. This is one of the more common reasons growing businesses shift from sole trader to company structure over time.
The catch is that this advantage mostly applies to profit you're leaving in the business. Once you draw money out as a shareholder salary or dividend, it's taxed again at your personal rate (with an imputation credit for the company tax already paid, so you're not fully double-taxed, but there's still a reconciliation happening). For a business where the owners are drawing out most of the profit to live on each year — which is common for a husband-and-wife business in its early years — the tax difference between sole trader and company structures is often smaller than people expect. The flat company rate helps most when profit is being reinvested rather than distributed.
There's also a practical tax-splitting angle worth mentioning specifically because you're working with a couple. As a company, you have more flexibility to pay each shareholder a salary that reflects their actual role and hours in the business, which can help spread income across both of you in a way that manages the household's overall tax rate more deliberately than a straight partnership split might allow.
Compliance and Cost Are Not Trivial
This is the part that often gets underweighted in the excitement of setting up a "proper" company. A company has meaningfully more admin than a sole trader structure. You'll need to file an annual return with the Companies Office, keep the company's financial records separate from personal finances, prepare annual financial statements, and file a separate company tax return alongside your personal returns. Realistically, this means higher accounting fees each year, and it's not something most business owners manage entirely on their own — which, to be fair, is exactly the kind of ongoing work we handle for clients.
A sole trader structure, by comparison, is close to the simplest set-up available. You need to register for GST once you cross the $60,000 turnover threshold (or earlier if you choose to), keep reasonable records, and file an individual tax return each year. There's no separate entity to maintain, no annual return, no director's duties to think about. For a business that's just getting started, particularly one testing whether the idea has legs before committing further, this simplicity has real value — both in cost and in mental bandwidth.
A Practical Way to Decide
Rather than treating this as an abstract legal question, it helps to work through it as a series of concrete ones. What's the actual risk profile of the business — are you likely to sign contracts, take on debt, employ people, or deal with situations where something could go wrong and cost a third party money? How much profit do you realistically expect in year one, and is most of it going to be drawn out to live on, or reinvested into growing the business? How comfortable are you taking on the extra admin and cost of running a company, versus wanting the simplest possible start while you prove the concept?
For many husband-and-wife businesses just starting out — low risk, modest early profit, most of it needed to live on — starting as a sole trader (or a simple partnership between the two of you) is often the sensible starting point. It's cheap, fast, and low-maintenance while you find your feet. For businesses that carry more inherent risk from day one, or that are expected to generate significant profit beyond what the owners need to draw out, setting up a company earlier tends to make more sense, both for the liability protection and the tax structure as the business scales.
It's also worth knowing this isn't a permanent, irreversible fork in the road. Plenty of businesses start as sole traders and convert to a company once they've proven the model and the numbers justify the extra structure. The conversion isn't complicated from a legal standpoint, though it does have tax and administrative implications worth planning for properly rather than doing in a rush.
The Bottom Line
There's no structure that's objectively "better" — only one that's better suited to where your business actually is right now, and where it's realistically heading. The right move is to look honestly at the risk the business carries, how the profit is likely to be used, and how much complexity you're willing to take on, rather than defaulting to whichever structure sounds more "serious." If you're weighing this up for your own business, it's worth talking it through with an accountant before you register anything — the right structure from day one can save a lot of unwinding later.
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