chapter 5

Business Structures

Structures

Your Options

(i) Sole Trader
(ii) Partnership
(iii) Company

Whether you’re just starting out or deciding on the right structure for your existing company, understanding the law around business organization is important. You'll have to assess the nature of your business to figure out which option will afford you the most benefits.

Sole Trader

This is the most common structure for online storeowners, and also the easiest to run and set up. The process of becoming a sole trader only involves registering with Inland Revenue to become an employer or a GST-registered business. With this structure, your business is not a separate entity from you. A sole trader does receive all profits, but they are also personally liable for all of the debts or legal action taken against the business. This common and simple structure is ideal for a shop with little risk of liability.

Pros

(i) Easy to set up and run.

(ii) Control of all business decisions and profits.

 

Cons

(i) If business is doing well, you could be put in a higher tax bracket.

(ii) Not a separate business entity.

(iii) You are responsible for all debts or actions against the company.

Partnership

Agreements

Considerations

A well-drafted and balanced agreement should include:

(i) Names of partners and how new partners can be added.
(ii) Outline of the business.
(iii) Investment, liability and profit share of each partners.
(iv) What if partnership is dissolved.

A partnership is another common structure for small businesses. These are formed when two or more individuals are co-owners of a business venture. This structure allows individuals to pool their assets and skills to increase their chances of success. Like a sole trader, a partnership is not a separate legal entity from its owners. This means the partners are personally liable for all debts and obligations of the business. An additional consideration is that all partners are liable for the actions of the others in relation to the business. One partner may be responsible for the debt of another if their assets are insufficient to cover an obligation.

With this form of organization, remember to focus on the human element. There’s always a chance that a friendly partnership can change in the future. For this reason, make sure to have a lawyer assist you when drawing up a partnership agreement. Selecting the right partner is important because you’re liable for the debts and actions that they incur on behalf of the business.

Pros

(i) Allows for a division of labor.

(ii) Partner brings more capital investment.

 

Cons

(i) Not a separate entity.

(ii) Jointly liable.

(iii) Business relationship can sour.

Company

Running a company has many benefits and does increase your credibility as a business. The process is more complicated but has many potential benefits for your online shop. The business cannot be called a company until it has been registered with the Companies Office. A company is a separate entity from you as an owner, meaning it has its own liabilities, debts and profits. You are not personally financially liable for what happens to the company. This is a good business structure if your company is growing and there is a greater potential for liabilities.

Pros

(i) Separate entity.

(ii) Limits your financial liability.

(iii) The corporation survives the death of shareholders or sale.

(iv) Tax advantages.

(v) Improves your credibility.

 

Cons

(i) Heavily regulated. This means that there are many requirements for running a corporation.

(ii) Requires continuous extensive record keeping of shareholder meetings etc.

(iii) More expensive then the others to form (fees associated with incorporation).

Choosing a business structure

It is really important that you consider the particularities of your business when deciding on the structure that is right for you. Although some options have benefits on paper, they may not be a worthwhile choice for your business. There are detailed and helpful resources made available to you by the Government of New Zealand. Before you finalize your decision or begin the process it is highly advisable to consult a lawyer to ensure that you have made a sound choice, and that the process is completed properly.

3 Steps to Incorporation

Company Name

Reserve the name of your company with the Companies Office.

This process can be done online. It's inexpensive and ensures that your company is the only one using that name.

You must use the name within 20 days.

 

Application

In order to complete the application, you must first create an account with the Companies Office.

Complete the application which includes providing and address, list of directors, shares and shareholders, and tax registrations.

Once the sections have been filled out you must review and pay.

 

Return Forms

It is important to be conscious of timing as these forms must be submitted 20 days after the name of the company was registered.

Conclusion

Share the Legal Guide if you think that it may be helpful information for your friends and followers.

 

Being aware of and obeying the rules that apply to you as an online business owner is an important aspect of running your shop.

Protecting your brand, your assets, and maintaining a positive customer relations are all affected by your ability to understand and obey the law.

The law is fluid and can always change! The resources provided to you in this book will allow you to stay up to date and make sure you are aware of requirements placed on you.

Ready to start your online business?

Try Shopify for free for 14 days.

Start your free 14-day trial today!