Sole Trader vs Company NZ: Which Structure Is Right for You?

A lot of New Zealand business owners hear the same advice once they start earning decent money: set up a company, because companies pay 28% tax.

That advice is incomplete. Sometimes a company is the right move. Sometimes it just adds accounting fees and paperwork without saving tax.

The real question is not "which tax rate is lower?" The real question is: how much profit do you need personally, how much can stay inside the business, and does limited liability or growth structure matter for what you are building?

Quick answer

A sole trader is usually simpler and cheaper when you are starting out, earning modest profit, or taking all the money out to live on. A company can make sense when you can retain profit, want limited liability, plan to bring in shareholders or employees, or are building a business to sell.

Decision rule: if you need nearly all the profit for personal living costs, a company usually does not create a major tax win. If you can leave meaningful profit inside the business, the 28% company rate can create a timing advantage.

Quick comparison

Companies Office fees are official. Accounting costs are market estimates and depend on how tidy the records are, GST/PAYE obligations, loans, assets, and accountant pricing.

The biggest mistake people make

A company does not magically make your personal income taxed at 28%.

If the company earns profit and pays all of it to you as salary or shareholder salary, that income is taxed to you at personal rates. The salary is usually deductible to the company, so the company does not pay 28% tax on that same amount.

The 28% company rate helps mainly when profit is retained inside the company. It is a tax timing and cash-flow advantage, not a permanent way to avoid personal tax. If retained profit is later paid out as dividends, extra tax may apply depending on imputation credits, dividend RWT, and your personal tax rate.

Example: a company earns $150,000 before owner salary. The owner takes $130,000. The company only has $20,000 left to tax at 28%. The company rate did not apply to the whole $150,000.

How sole traders are taxed

A sole trader is not separate from you for income tax. Business profit goes into your individual IR3 tax return and is taxed at personal rates.

Current individual income tax rates from 1 April 2025 are:

Sole trader tax is based on profit, not drawings. If your business makes $90,000 profit and you only withdraw $50,000, you are still taxed on $90,000.

For a deeper explanation, read how much tax sole traders pay in NZ or estimate your own numbers with the self-employed tax calculator.

How companies are taxed

A company is a separate legal entity. It pays income tax at 28% on company profit.

Money can come out to the owner in a few ways:

• Salary or wages with PAYE deducted.
• Shareholder salary, often calculated after year-end.
• Dividends paid from after-tax company profit.
• Drawings or shareholder current account movements, which need careful accounting.

Shareholder salary is generally deductible to the company and taxable to the shareholder. Dividends can carry imputation credits for company tax already paid, which helps prevent the same company profit being fully taxed twice.

For the company tax basics, see how company tax works in New Zealand, the company tax calculator, and TaxPop's imputation credits guide.

Worked examples: income tax only

The examples below compare income tax only. They do not include ACC, accounting fees, GST, student loans, KiwiSaver, or future dividend top-up tax. That keeps the structure comparison clean.

Example 1: $60,000 profit

Verdict: no income tax saving from the company if all profit is paid to the owner. The sole trader structure is usually simpler and cheaper at this level.

Example 2: $120,000 profit, all extracted

Verdict: still no income tax saving if the full profit is extracted. A company may still be useful for liability or growth reasons, but not because the whole $120,000 is taxed at 28%.

Example 3: $120,000 profit, retain $40,000

Verdict: the company starts to show a tax timing benefit, but extra accounting and compliance costs may reduce or remove the saving.

Example 4: $250,000 profit, retain $100,000

Verdict: if a meaningful amount can stay inside the company, the structure can create a real cash-flow advantage. The more profit you need personally, the smaller the benefit becomes.

What about ACC?

ACC is separate from income tax. Sole traders usually pay ACC on liable self-employed earnings. Company owners who pay themselves salary also usually have ACC connected to that salary.

So a company does not automatically make ACC disappear. Retained company profit is different from personal earnings, but salary paid to you is still personal income. If ACC is a major part of the decision, get advice for your exact setup.

When staying sole trader makes sense

A sole trader often makes sense when:

• You are testing a business idea.
• Profit is under about $70,000.
• You need most or all profit for living costs.
• The business is low risk.
• You do not have staff or major contracts.
• You want simple records and lower accounting fees.
• You are not planning to bring in investors or sell the business soon.

The simplicity is valuable. You file an IR3, keep good records, claim business expenses, and pay tax on profit. See the business expenses guide if you want to reduce taxable profit correctly.

When a company makes sense

A company may make sense when:

• Profit is consistent and you can retain a meaningful amount.
• Liability risk is higher.
• You are signing larger contracts.
• You plan to employ staff.
• You want shareholders, investors, or co-owners.
• You are building a business that may be sold.
• Your clients or industry expect a company structure.

Limited liability is useful, but it is not absolute. Directors can still face personal liability in some situations, and personal guarantees on loans or leases can reduce the protection.

Income splitting: be careful

Companies can distribute dividends to shareholders. That can sometimes produce different tax outcomes where there are genuine shareholders on different tax rates.

But this is not something to treat as a shortcut. Shareholding, dividend rights, work done in the business, family arrangements, and commercial purpose all matter. IRD can challenge artificial arrangements.

Use cautious wording with your accountant: "Does this structure have a genuine commercial basis?" not "How do I split income to pay less tax?"

Common myths

A company always pays less tax.
No. If all profit is paid to you as salary or shareholder salary, the income tax result is usually similar to being a sole trader.

The 28% company rate applies to everything I earn.
No. It applies to company profit that remains taxable in the company. Salary paid to you is taxed personally.

A company means no personal risk.
No. It can reduce risk, but directors' duties, tax obligations, health and safety duties, and personal guarantees can still create personal exposure.

I should incorporate as soon as I hit $70,000.
Not automatically. The better question is whether you can retain profit and whether the structure helps with risk, growth, staff, investors, or sale plans.

Dividends mean double tax.
Not usually in a simple fully imputed NZ company situation. Imputation credits recognise company tax already paid. But extra tax may still be payable depending on your personal rate and dividend tax treatment.

Should you switch?

Ask yourself:

• Can I leave at least $30,000-$40,000 in the business most years?
• Is my business risk high enough that limited liability matters?
• Am I planning to hire, raise investment, add shareholders, or sell?
• Can I handle extra accounting and admin costs?
• Are business and personal funds already easy to separate?

If most answers are no, staying a sole trader may be the cleanest option for now. If several answers are yes, it is worth talking to an accountant before switching.

Practical next steps

• Estimate sole trader tax with the self-employed tax calculator.
• Estimate company tax with the company tax calculator.
• Read how company tax works in New Zealand.
• Review business expenses for sole traders.
• Check provisional tax timing with the provisional tax calculator.

FAQs

Bottom line

Stay sole trader if you need simplicity and take most profit personally. Consider a company if you can retain profit, need limited liability, or are building something that needs shareholders, staff, contracts, or a future sale.

General information only - structure decisions can have tax and legal consequences, so check with an accountant before switching.

Sources: IRD individual tax rates, IRD imputation credits, Companies Register fees.