THE ULTIMATE GUIDE TO BUSINESS STRUCTURES AND RECORD-KEEPING

Want the ultimate guide to business structures and record-keeping in New Zealand? You’ve come to the right place! Managing a business in New Zealand involves careful planning, choosing the right structure, and maintaining meticulous records. This guide explores the most common business structures in New Zealand and provides practical tips on record-keeping to ensure compliance with Inland Revenue requirements and help your business thrive.  First: the video

Understanding Business Structures in New Zealand

Choosing the right business structure is crucial as it affects taxation, liability, and operational processes. In New Zealand, the three most common business structures are sole traders, companies, and partnerships. (Another business structure is a trust; see this article for the merits of trusts vs other entities). Each has unique characteristics and responsibilities.

1. Sole Trader

A sole trader is the simplest business structure where the owner and the business are considered a single entity. Key features include:

• IRD Number: Your personal IRD number is used for business purposes.

• Profits and Debts: You retain all profits but are also personally liable for debts and taxes.

• Tax Returns: You’ll file an individual income tax return, including all business income and other earnings.

2. Company

A company is a separate legal entity from its owners, offering distinct advantages and responsibilities:

• Separate IRD Number: Companies must register with the Companies Office and obtain their own IRD number.

• Liabilities: The company owns assets and is responsible for debts to a degree.

• Tax Filing: Companies submit an IR4 non-individual income tax return.

• Directors’ Responsibilities: Directors and shareholders have specific legal obligations.

3. Partnership

A partnership involves two or more entities—individuals, companies, trusts, or other partnerships—collaborating in business. Characteristics include:

• Shared Responsibilities: Partners share profits, debts, and taxes. A partnership agreement (written or verbal) is highly recommended to clarify roles and expectations.

• Joint Liability: Partners are jointly and severally liable for all debts, meaning one partner can be held responsible for the entire amount if others cannot pay.

• Tax Filing: The partnership files an IR7 tax return, but the profits are distributed to partners, who then pay tax on their share.

Transitioning Between Structures

As businesses grow or personal circumstances change, it’s common to transition between structures. For example, a sole trader might evolve into a company for liability protection, or a partnership might dissolve if a partner departs. When choosing or changing a structure, consult an accountant, lawyer, and a risk advisor to ensure the decision aligns with your goals.

The Importance of Good Business Records

Good records are the cornerstone of a successful business. They not only simplify tax obligations but also support informed decision-making and help manage operational efficiency.

Benefits of Good Record-Keeping

• Tax Compliance: Accurate records ensure you meet Inland Revenue requirements.

• Business Insights: Track income and expenses to gauge financial health.

• Cost Savings: Well-organized records can reduce accountant or bookkeeper fees.

• Flexibility: Essential for securing loans, attracting investors, or selling the business.

Key Records to Keep

• Receipts and Invoices: Ensure you keep detailed invoices instead of just EFTPOS dockets, as the latter lacks sufficient information.

• Bank Statements: These complement receipts by showing transaction locations and amounts but don’t detail purchases.

• Logbooks: Track business-related mileage and vehicle use.

• Working Papers: Maintain notes and calculations used for GST or tax returns.

Separate Bank Accounts

Using separate accounts for personal and business finances simplifies tracking and allows business-related bank fees to be classified as expenses. Discuss available options with your bank.

Formats for Keeping Records

Whether you prefer digital solutions or traditional methods, compliance is key. Options include:

• Paper Records: Old-school but effective. Keep documents organized and accessible.

• Digital Records: Store files on your computer or cloud services. Download Inland Revenue’s cashbook template for streamlined tracking.

• Scanned Copies: Photograph or scan receipts, especially those printed on thermal paper, which fades over time.

Remember, business records must be kept for seven years after the financial year they relate to.

Inland Revenue’s Cashbook Template

Inland Revenue offers a downloadable Excel-based cashbook template tailored to small business needs. Here’s how it works:

• Customizable Columns: Adjust headings to match your income and expense categories.

• User Instructions: Includes a dedicated tab with setup and usage guidelines.

• Access: Search for “cashbook” on ird.govt.nz to download the template.

Tips for Successful Record-Keeping

1. Consistency: Update records regularly to avoid errors.

2. Backup: Keep digital backups to safeguard against data loss.

3. Professional Help: Work with an accountant or bookkeeper to review your records.

4. Stay Updated: Monitor tax obligations and updates from Inland Revenue.

Final Thoughts

Choosing the right business structure and maintaining accurate records are vital steps in running a successful business in New Zealand. By understanding your responsibilities and leveraging tools like the cashbook template, you can simplify tax compliance, gain financial clarity, and position your business for growth.

We hope you found the ultimate guide to business structures and record-keeping helpful. When in doubt, seek professional advice to tailor solutions to your unique needs. Call us on 099730706 ext 2 or click here to send us a message