Company Tax vs Sole Trader: Choosing the Right Business Structure in NZ

The Two Main Options

When you start a business in New Zealand, the structure you choose determines how your profits are taxed, what paperwork you file, and your personal liability.

The two most common structures are:

Feature	Sole Trader	Company (NZ Ltd)
Tax rate	Personal rates (10.5% – 39%)	Flat 28% on company profits
Legal entity	You = the business	Separate legal person
Liability	Unlimited personal liability	Limited to company assets
Setup cost	Free (just start trading)	$115 Companies Office registration
Annual filing	IR3 tax return	Company IR4 return + annual return ($53)
ACC	Earners’ + working safer levies	Same, but on shareholder-salary
GST	Required if turnover > $60,000	Same threshold

How Each Structure Is Taxed

Sole trader

All business profit flows directly to your personal tax return. You pay tax at your marginal rate:

Taxable income	Rate
$0 – $15,600	10.5%
$15,601 – $53,500	17.5%
$53,501 – $78,100	30%
$78,101 – $180,000	33%
$180,001+	39%

Company

The company pays a flat 28% tax on all profits. You then have three main ways to extract money:

1. Shareholder salary: Deductible for the company, taxed at your personal rates
2. Dividends: Paid from after-tax profits, with imputation credits attached
3. Drawings against a current account: Must be managed carefully to avoid deemed dividends

Most owner-operators use a combination of salary and dividends to optimise their overall tax position.

When the Company Structure Wins

The 28% company rate becomes advantageous when your personal marginal rate exceeds 28%. That happens at $53,501 (where the 30% rate begins). But the real savings come when you can retain profits in the company rather than drawing them all out.

Scenario: $120,000 business profit

	Sole Trader	Company
Business profit	$120,000	$120,000
Company tax (28%)	—	—
Shareholder salary	—	$70,000
Company taxable profit	—	$50,000
Company tax on $50,000	—	$14,000
Personal tax on $120,000	$27,460	—
Personal tax on $70,000 salary	—	$14,020
Total tax	$27,460	$28,020

Wait — the company option is slightly more expensive? That’s because we’re extracting most of the profit. The company wins when you retain earnings:

	Company (retain $50k)	Company (dividend $50k)
Company tax	$14,000	$14,000
Personal tax (salary)	$14,020	$14,020
Dividend tax (top-up to 33%)	—	$2,500
Total tax	$28,020	$30,520
Cash retained in company	$36,000	$0

If you retain the $50,000 in the company for future investment or business growth, you’ve deferred $2,500 in personal tax. Over multiple years, this deferral compounds.

When the Sole Trader Wins

For most Kiwis earning under $70,000 from their business, staying as a sole trader is simpler and often cheaper:

• Your effective tax rate on $70,000 is about 20% — well below the 28% company rate
• No company registration, annual return fees, or separate accounting
• No complexity around shareholder salaries and dividends
• Losses flow directly to your personal return (useful in early years)

Look-Through Companies (LTCs)

An LTC is a hybrid: it has the limited liability of a company, but profits and losses flow through to shareholders’ personal returns — like a sole trader for tax purposes.

LTCs suit businesses that:

• Want limited liability but have owners in the 28% or lower bracket
• Expect early-year losses they want to offset against personal income
• Have five or fewer shareholders (all natural persons or other LTCs)

Note: LTCs can’t retain profits at 28% — all income is taxed at personal rates.

Key Takeaways

• Under $70,000 profit: Sole trader is usually simpler and cheaper
• $70,000 – $120,000: Company may help, but mainly if you can retain profits
• Above $120,000: Company structure increasingly valuable for tax deferral
• The company rate is 28% — you save when your marginal rate exceeds this and you retain earnings
• Don’t forget the admin costs: company returns, accounting fees, and annual filing add $1,000–$3,000/year
• LTCs offer a middle ground with limited liability and personal tax rates

Use the company tax calculator and sole trader tax calculator to compare your specific situation.