How will your business structure need to change in the coming years? Are there benefits in reorganizing your company? Sometimes sole trading businesses are better off transitioning to a limited liability company.
Keep an eye on the future. When the right time comes, and the right reasons present themselves, you may decide to make a change. Let’s look at the key things to consider when you jump into a new business structure.
Main Difference Between Sole Traders and LLC
Being a sole trader is easy enough since you only must declare to the Internal Revenue Department your annual income, then pay the required income tax.
If you become a limited liability company, all your business assets, profits, debts, and liabilities are under a registered company name.
When your sole trader income reaches NZ$60,000, you must register for, collect, and pay the 15% GST tax. Once you reach this income threshold you aren’t expected to become a limited liability company. However, many financial advisors recommend sole traders switch to LLC once they exceed the NZ $60,000.
The Benefits of Becoming a Registered Business
Personal Liability
When you’re a sole trader, then you’re personally taking on the liability. If your business is a personal lawn care service or selling items online, then you may not be in much peril of getting sued or having a liability claim filed.
On the other hand, if you offer services or products that expose you even more, it might be worth becoming an LLC. Legally registered businesses provide additional protection from liabilities that you could face.
Moving from sole trader status to a limited liability company may be a good move if you have employees or will be hiring employees. Any potential liability issues caused by hiring staff should be transferred from you to a registered company.
Tax Advantages
Experienced accountants know that limited liability companies can be structured so that your business benefits with lower income tax and a wide variety of claimable expenses.
Status
Moving your corporate structure from sole trader to LLC bumps up your status. There’s an element of professionalism that comes with a registered corporate name versus an individual. By approaching the market as a limited liability company, your clients will most likely have a better perception of your capabilities. For some reason, establishing your business as an LLC makes the public feel more confident in your abilities.
Future plans to bring on additional shareholders will need you to be trading as an LLC, not a sole trader.
Review Your Business Insurance
While considering the transition from one business structure to the next, you’ll want to sit down and go over your small business insurance policies. There may be a need to shop for additional coverage (or different coverage) depending on what’s required of your industry or just lowering your current premiums. Instead of talking with an accountant, it’s a good idea to touch base with an experienced business insurance provider or simply comparing quotes from multiple insurance companies online.
The Downsides of Being a Registered Business
You might appreciate the low maintenance involved with running a sole trader business. The thought of officially registering your business may fill you with dread. After all, there are added fees ($160 to register and $45 per annum),
and you’ll need to work with an accountant to manage the additional paperwork each year.
Any potential downsides to trading as a limited liability company are offset by the additional tax benefits your business will earn.
Steps for Becoming a Limited Liability Company
The best place to begin your transition is by talking with your trusted business accountant or advisor. Many accountancy firms offer free consultations to discuss the pros and cons of changing business structures.
Depending on your current corporate structure, the process of switching to LLC isn’t all that difficult. First, you’ll need to register your business with the Companies Office. This is also known as incorporating your business.
You’ll have to check that your company name is available. If it is free and clear, then you can move ahead with reserving the business name and registering it with a minimal fee. Afterwards you’ll be given an NZBN (New Zealand Business Number) for use when dealing with suppliers, customers, and the government.
Every registered New Zealand business must declare a bit of information about the company’s shareholders and directors, even if there’s only you right now.
Next, you’ll have to open a bank account for the business and transfer assets into the company’s name. It’s best to have your business accountant help with this task.
Now You Know What to Do
New Zealand’s economy includes a tapestry of small businesses. Yet many small business owners may not have a complete grasp on the differences between being a sole trader and a limited liability company. It’s important that you better understand which structure lends itself to the most efficient and profitable version of your company. Creating a long-term plan for your business can help you avoid future headaches.
