News and Events

The new company tax rate of 30% came into effect on 1 April 2008.

In light of the lowering of the tax rate it may be appropriate to consider restructuring your affairs to utilise a company as your trading entity.

This article considers advantages and disadvantages of using a company.

Advantages

• Limited liability;
• There is a great degree of flexibility associated with the capital structure of any company.  There is an ability to do the following with ease:-
  • Vary the rights of shareholders in relation to dividends or control;
  • Expanding the size of the company;
  • Ownership and management can be conveniently separated; 
  • Effective control and ownership of the entity may change without interfering with the structure of the organisation.
  • Unlike a partnership the death of a party (ie a shareholder) does not necessitate a need for change.
• Tax rate.

Disadvantages

• Cost of incorporation and ongoing administration.
• Duties imposed on company directors.
• Problems associated with dissatisfied minority shareholders.
•  A greater degree of regulation creating a level of inflexibility when contrasted against other forms of entities.

Taxation Considerations for a Company

• A company must file tax returns and pay income in New Zealand in respect of the company's worldwide taxable income at the company tax rate of 30%.
• Tax losses cannot be passed through to a company's shareholders (unless the company is in LAQC).  Although so long as there has been no break in continuity losses can be carried forward.
• There is an ability for tax losses of one company in a group to be offset against the income of another company within the same group.

Formation of a Company

• In forming a company there are a number of steps that need to be undertaken including:-
• Name reservation for company.
• Directors and shareholders will need to be appointed.  The directors will be responsible for the day to day management of the company and the shareholders will contribute the initial capital.  Both directors and shareholders must consent.
• There are rules relating to directors as follows:-
• The director must be over the age of 18 years;
  • They cannot be an undischarged bankrupt;
  • They cannot be prohibited under any other statutory provisions which includes being convicted of a crime involving dishonesty in the five years prior to acceptance of the appointment as a director.
  • Companies are governed by the Companies Act 1993 however it is possible for a company to alter its obligations under this legislation and to a certain degree regulate themselves.  They can do this by drafting and being bound by a Company Constitution or alternatively, the shareholders can enter into a Shareholder's Agreement to govern their relationship.

Once the company is formed the existing business can be transferred.  There will be a number of things to consider and we suggest you obtain professional advice at this point.

Please remember, this information is designed as a guide only and shouldn't replace the advice of you legal professional.  We welcome your comments: damien.pine@awslegal.com