Factors to Consider
- The owner's liability for debt incurred and for other legal obligations assumed;
- The funding arrangements;
- The tax implications;
- The number of people involved;
- How the business will be managed;
- The contributions of the owners to the capital of the business and the sharing of profits;
- Whether the business is a one-off project or whether it is expected to continue.
Partnership
This is where two or more people carry on business together with a common purpose. There are no particular legal formalities for a partnership agreement, although a written agreement can help avoid problems in the future. The Partnership Act 1908 applies to all partnerships and sets out some limited guidelines; For example, a partnership must be registered with the IRD and an annual tax return must be filed to show assessable income and how it has been divided amongst the partners.
Advantages
A partnership can trade under any name it likes (as long as it doesn't breach the Fair Trading Act or anyone else's rights), and there is no need for registration.
Disadvantages
As there is no limited liability, each partner is liable for all of the partnership's debts. That is, if one partner cannot pay then the other partner will have to pay the total debt rather than just their share.
Limited Liability Company
A company acts as a separate legal entity. This means that it is distinct from its owners and shareholders. The company holds rights and obligations as if it was an actual person. The company acts through the actions of its directors. The directors have full powers of management of the business and affairs of the company. Directors become liable when they allow the Company to continue trading when it is unable to pay its debts.
In order to set up a company it must be registered with the Companies Office. Now this is a relatively straightforward process that can be done over the Internet. To register a Company, it must have:
- A name
- One or more Shares
- One or more Shareholders
- A Registered Office
- An Address for Service
Normally the registered office and address for service is at a formal office such as a lawyer or accountant. Once these requirements have been met the Company can become incorporated.
Once incorporated, the Company is responsible for its own business debts and obligations rather than the directors or shareholders.
Banks and other suppliers try to short circuit the limited liability of the company by requiring personal guarantees from the directors or shareholders.
Advantages
- Limited Liability. It is a separate business risk from the shareholders personal assets.
- It can limit the amount of money that a business owes personally. A shareholder's liability is limited to the unpaid value of the shares that they hold (i.e. A shareholder holding 100x $1.00 shares is limited to owing $100.00.)
- A name. Once registered no other company can use the same or a near identical name.
- Separate Legal Entity. This means that the company's debts and taxes are separate from the owner or shareholders. This allows for the shareholder to enter into a contract with the company, i.e. for employment, or loaning money.
- Finance. A company is able to raise capital by:
- - Issuing new shares;
- - Offering the company as security (or collateral). That is, when taking out a mortgage a company has more options than as an individual as the business world is set up to deal with companies.
- Security for a shareholder's loan. It is possible for a shareholder to take a loan from the Company. In the event of financial difficulties for the Company the shareholder ranks ahead for the unsecured creditors in the distribution of the assets.
- Longevity. A company can exist beyond the lifetime of its shareholders as long as it continues to file annual tax returns.
Disadvantages
- Cost. The cost of Incorporation.
- Public information. Certain information relating to the company is made public in order for it to be registered, i.e. its registered office, the names of the directors.
- Accounts. The Companies Act ensures that all of the Company's accounting records must be kept in accordance with the Act.
- On-going Administration. There are strict guidelines as to the bookkeeping and annual reports of the Company.
Please contact us if you want to discuss your options when it comes to setting up a business.
