BUSINESS AND OPERATING STRUCTURES































What is a business structure?
Why do I need to worry about business structures?
What are the different ways I can structure my business?
What is a sole trader?
If I’m a sole trader do I have to use my own name for the business?
If I’m working for someone else am I still a sole trader?
Why is it important to establish whether I’m an employee or a sole trader?
What are the advantages and disadvantages of being a sole trader?
How much administration is required in being a sole trader?
What is a partnership?
Do we have to agree to form a partnership?
How does the Partnership Act affect us?
Do we need a written Partnership Agreement?
What are the advantages and disadvantages of a partnership structure?
How much administration is required in a partnership structure?
What is a limited liability company?
How is a company different to other structures?
How do we agree how our company is to be run?
What is a Shareholders Agreement?
If we are a band is there anything we should specifically include in our Shareholders Agreement?
How much administration is required in a company structure?
What are the advantages and disadvantages of a company structure?
What is a “non-profit” organisation?
Why adopt a non-profit legal structure?
Are there different types of non-profit organisations?
What is a Charitable Trust?
What makes a trust a “Charitable Trust”?
What is the benefit of having “Charitable” status?
Can only trusts have charitable status?
How do I go about arranging for charitable status?
How relevant is a non-profit type structure to my business?
This Fact Sheet has been made possible by the funding
received by the Creative People’s Centre from the New
Zealand Law Foundation.
This Fact Sheet is not legal advice. This information is intended to
provide a general outline of the relevant legal issues and further
professional advice should be sought before any action is taken in
relation to the information contained in this Fact Sheet.
This checklist remains at all times the property of the Creative People’s
Centre. You may make use of this Fact Sheet only for your own
personal information. Under no circumstances may this Fact Sheet or
the information in it be copied or distributed to any third party by you
without the prior written agreement of the Creative People’s Centre.
What is a business structure?
When you set up a business, you need some form of trading structure under
the umbrella of which you will open a bank account, pay taxes and start
trading. It is important that you thoroughly assess your business needs so
you choose the right structure, and to help with this, you may need to seek
advice from a professional, such as a lawyer, accountant or other type of
business advisor.
Why do I need to worry about business structures?
At the outset of most artists’ and creatives’ careers, considerations such as
organisational structures are not priorities. However, it is crucial to set up the
correct trading structure right from the start, to maximise your income and tax
advantages, as well as to ensure that you are not under any unnecessary
administrative obligations. As your business and career develop overtime it
may also be necessary to make changes to the structure through which you
operate, or even adopt an entirely different form of structure, in order to
ensure you are putting yourself in the best position possible.
What are the different ways I can structure my business?
There are many ways of operating a business and a number of business
structures to choose from, including a sole trader, partnership, limited liability
company and a non-profit organisation. The key however is to work out what
is the best structure for your particular business or intended operation.
What is a sole trader?
The simplest and easiest way to get started in business is to begin as a sole
trader. A sole trader controls, manages and owns the business. A sole trader
is personally entitled to all profits and is personally liable for all obligations and
liabilities (e.g taxes and debts).
Usually a sole trader can begin a business without following any formal or
legal processes to establish it (other than perhaps for IRD and ACC
registration).
If I’m a sole trader do I have to use my own name for the
business?
If you are a sole trader you don’t have to trade under your own name. For
instance, you could call your business “Village Art Supplies”. However in any
situation where you are required to give the legal name of your business the
correct title will be “[your name] trading as ‘Village Art Supplies’”. This reflects
the fact that although the business may have a separate name, at the end of
the day it is you personally who is the business.
If I’m working for someone else am I still a sole trader?
If you are doing work for someone else it is very important to establish
whether you are an employee or an independent contractor (i.e. a sole trader).
In many cases it might be quite obvious that you are an employee, for
instance you have signed an employment agreement which clearly defines
your status and the employer also has significant control over the work you do
and when you do it. There may be other factors which also help to distinguish
your relationship as one of employment such as the person you are providing
your services to supplies any equipment or supplies that you may need to
perform the services in question. However in some situations the distinction
between employee and independent contractor can be a fine one.
Why is it important to establish whether I’m an employee or a
sole trader?
The consequences of this distinction are significant. In particular, an
independent contractor is primarily responsible for their own taxation and ACC
levies, whereas in an employer/employee relationship such obligations are the
employer’s responsibility. An employee also has rights under the Employment
Relations Act.
What are the advantages and disadvantages of being a sole
trader?
The main advantage of working as a sole trader is that it is the most flexible
form of legal entity. It is simple to set up and to run, and no registration is
required in respect of the structure itself. The major disadvantage however, is
that the sole trader is entirely liable for any losses or debts that they may
incur, putting their personal assets at risk. It is for this reason that people tend
to look for ways in which to limit their liability by using a different kind of
business structure such as a limited liability company. It can also be harder to
attract loans and investment, and the business only lasts for the lifetime of the
business owner (unlike a company, which has a “life” of its own).
How much administration is required in being a sole trader?
A sole trader may only require a bookkeeping service, which involves
assistance with GST returns, advice on tax deductible expenses, and the
preparation of annual income tax returns.
What is a partnership?
In a partnership, two or more people carry on a business in common with a
view to making a profit. Their legal relations are governed by the provisions of
the Partnership Act 1908.
In a partnership in its purest form, each partner shares responsibility for
running the business; personally shares in any profit or loss equally, binds
each of his or her partners by the doing of any act in carrying on business for
the partnership, and is personally liable for any obligations, liabilities or debt
within the partnership.
The partnership itself does not pay income tax. Instead it distributes the
partnership income to the partners (with the proportions being determined in
most cases under the Partnership Agreement), with the partners then paying
tax on their own share.
Do we have to agree to form a partnership?
As there is no formal process that is necessarily required to establish a
partnership it does mean that anywhere where two or more people are
carrying on business together with a view to making a profit, a partnership will
automatically at law be deemed to exist. Consequently a band could well
automatically be deemed to be a partnership at law. For some of the reasons
set out above (e.g. being jointly liable for any debts or liabilities of the
partnership) this can have quite serious personal implications for each
individual who is a partner in the partnership. For example if the band owes
money, any one member can be required to repay the entire amount owed.
How does the Partnership Act affect us?
In the absence of a written Partnership Agreement the Partnership Act
governs the legal relationship between the partners. In particular, it provides
that all partners are entitled to share equally in the capital and profits of the
business, and must contribute equally to the losses. In this respect, the Act
does not make provision for the fact that different members may have
contributed different amounts in terms of skills and/or money, and should
consequently be entitled to different shares. The Act also provides that any
one partner may dissolve the partnership.
Do we need a written Partnership Agreement?
Ideally whenever trading through a partnership structure, the partners in the
business should put in place a Partnership Agreement. One of the main
benefits of a Partnership Agreement is that it can be used to provide more
accurately for the particular needs of the partners in the specific situation
compared with the more high level governance and guidance that the
Partnership Act provides. So whether you are a group of artists operating a
gallery or members of a band or a theatre company, a Partnership Agreement
can help you more specifically provide for the issues that will be important for
you. It is recommended that advice is taken from a lawyer experienced in this
area, and that wherever possible a Partnership Agreement is drafted that
covers all contingencies and possible conflicts that might arise between the
partners. However even if only a few of the key issues are dealt with it is
better than having nothing in place.
What are the advantages and disadvantages of a partnership
structure?
A partnership can be a useful way to share business administration costs, and
again, no registration of the structure itself is required to start trading.
However, as discussed above, partners may be liable for debts incurred by
other partners, personal assets may be at risk and there is potential for
conflicts amongst the partners and possible complications if a partner dies or
wishes to leave the partnership.
How much administration is required in a partnership
structure?
A partnership may have anything from, similar administration requirements to
a sole trader business where for instance there are only two individual
partners involved, right through to much more complex administration
requirements in the situations where the partners themselves are companies
or trusts. The size of a partnership would also of course dictate the level of
administrative services required by the partnership.
What is a limited liability company?
A limited liability company is the most common way by which people choose
to do business. A company exists as a legal entity in its own right. It is legally
separate from its shareholders (or owners) and its directors (or managers).
Companies are incorporated under the Companies Act 1993. A person, or a
group of people or even another company can own shares in a company. The
company owns the assets of its business, is responsible for any debts or other
liabilities; is responsible for paying tax on its income and keeps any profits for
itself or may distribute such profits to its shareholders.
How is a company different to other structures?
Some of the key structural differences between a limited liability company and
the other structures mentioned in this Fact Sheet which make a limited liability
company an attractive business structure include:

Limited Liability: A shareholder’s liability for losses incurred by a
company is limited to the extent that the company has not been fully
paid for the shares issued to the shareholder. If fully paid, then the
shareholder has no further liability. Lending institutions and some
creditors will sometimes however try to get around the limited liability
nature of a company by requiring company directors and/or
shareholders to give personal guarantees for company obligations or
for company debts. Personal liability may also attach to a director (or
to a person who is deemed to have been acting as a director) if a
company has been trading in a situation where it can’t pay its debts or
is considered to be trading recklessly.

Perpetual succession: This means that the company continues to exist
irrespective of any changes of ownership of its shares.

Tax: There are various reasons why it may be advantageous to form a
company for tax purposes. In particular, the company pays tax at a
different rate from the shareholders’ personal tax rates. Everyone’s
personal situation is different though and specific advice should always
be sought on these issues from an accountant.

Shares: Shares can be on sold to other people.

Rules: The rules of the company are clear through both its constitution
(if it has one) and the Companies Act 1993.
How do we agree how our company is to be run?
In the first instance the Companies Act will dictate generally how a company is
to be run and the obligations that are to be met. However a company can
also put in place a Constitution by which more specific provision can be made
for how the company is to operate, compared with the general arrangements
provided for by the Companies Act.
What is a Shareholders Agreement?
In addition to a Constitution the shareholders of a company may also decide
to put in place an agreement between them that even more specifically
provides for their individual interests in terms of how the company is run. This
is known as a ‘Shareholders Agreement’. The other benefit of using a
Shareholders Agreement is that a Shareholders Agreement is a private
document where as a Constitution will be registered with the Companies
Office and freely available for anyone to view. In other words within a
Shareholders Agreement the shareholders can provide for certain things that
they may not necessarily be comfortable with just anyone knowing about.
If we are a band is there anything we should specifically
include in our Shareholders Agreement?
The issues to be dealt with in a Partnership Agreement and a Shareholders
Agreement are in fact relatively similar although with some obvious
differences which relate back to the different characteristics of the company
and partnership structures themselves. The following is a more specific
outline of some of the types of practical issues that bands need to deal with no
matter what legal structure they decide to conduct their business through:

Sharing of profit and losses: Are all members to share in all income
generated from the activities of the band equally?

Assets: It is important to establish what equipment and property (e.g.
master recordings and videos) belongs to the band, and what belongs
to the individuals.

Decision making and authority: Who decides what? Does everyone
have to agree on everything or is a majority decision sufficient? It may
be that certain types of decisions can be left to one or two members
whereas others require everyone to agree.

Leaving members: How can someone be removed from the band?
Some consideration should also be given to a leaving member’s
entitlement to a share of the property of the band, and how that share
is to be calculated and paid.

Group name: A name can be one of the most valuable assets of a
band. If the band breaks up, who is entitled to go on using the name?
How much administration is required in a company structure?
Administering a company will require meeting the various reporting
requirements of the Companies Act 1993 including the preparation of an
Annual Report including full annual financial statements and various other
information in respect of the company as well as complying with the various
resolution and other record keeping requirements of the Act generally. The
company and shareholders may also require tax planning services to
minimise tax and also general tax advice during the course of the trading year.
What are the advantages and disadvantages of a company
structure?
Under a company structure, it is generally easier to attract funds and
investment, as investors can become shareholders, and as a company is an
independent legal entity, it is also easier to sell the business or pass it on to
others. A company also sustains more credibility in the market place. The
shareholders’ liability for losses is also generally just limited to the money they
have to date paid or agreed to pay for their shares, except where they may
have given personal guarantees for company debts. This is in direct contrast
with partnerships or sole traders where the individuals involved are personally
liable for any debts incurred while trading. It is also essential that anyone
acting as a director of a company clearly understands their responsibilities
and obligations under the law as reckless trading by the company or trading
when the company is not able to pay its debts can lead to the directors being
held personally liable for the debts of the company.
The disadvantages of utilising a company structure are generally perceived as
being the effort and expense involved in forming, operating and winding them
up. Companies do require a lot of paperwork, both in their establishment and
ongoing operation. Taxation issues such as fringe benefit taxes and
dividends further complicate matters.
None of these problems are
insurmountable. What they mean is that to enjoy the benefits of limited
liability, it is necessary to spend a little more time and money establishing and
running the company appropriately.
Whether or not the benefits of the company structure are worth the time and
expense in any specific situation is dependent upon a number of factors. If
you don’t own anything of value, or if the trading debts you are likely to incur
are minimal, then being personally liable for all your trading debts may not be
of concern. However, if you are exposing yourself to financial risk through
your creative activities, and especially if you have something to lose in terms
of your personal assets, trading as a limited liability company may be worth
investigating.
What is a “non-profit” organisation?
In the case of a non-profit organisation any income earned in excess of the
running costs of the organisation is re-invested back into the organisation
itself. In contrast to what may occur in a partnership or a limited liability
company, any such excess income or ‘profit’, is not distributed to the
individual members. It should be stressed however that such “non-profit”
organisations may in fact make a profit it is just that these profits can not be
distributed for the personal benefit of their members or managers. A nonprofit organisation can also still pay market rates for any services it is provided
and can also employ or contract staff on normal commercial terms.
Why adopt a non-profit legal structure?
Such organisations are particularly appropriate where government or
community funding is a major source of income, as such funding is often
unavailable to the more traditional profit orientated organisations such as
limited liability companies. Non-profit type structures may also be more
appropriate where the continuing goals and objectives of the organisation
itself are seen as more important than those of the individuals who comprise
the organisation or where the organisation has a particular community or
public benefit objective. Consequently, non-profit organisations are not the
best structures to run a traditional business through, as after all, a traditional
business is all about generating profit for its owners.
Are there different types of non-profit organisations?
Probably the most common form of non-profit organisation in New Zealand is
the incorporated society.
A society which is incorporated under the
Incorporated Societies Act 1908 has an independent legal identity which
means that the society can enter into contracts without subjecting its members
to personal liability. This is however provided that the subject matter of these
contracts is within the stated objective of the society and does not involve
passing any income or assets of the society on to members of the society for
their own personal use outside of the activities of the society. The society will
also continue to exist irrespective of changes in its membership. For more
specific information on setting up and running an incorporated society please
refer to the Societies and Trusts website at www.societies.govt.nz.
What is a Charitable Trust?
Another common type of non-profit organisation in New Zealand is a
Charitable Trust. Where as an incorporated society can have a wide range of
members who can ultimately have a say in the running of the incorporated
society, a Charitable Trust is, as the name suggests, essentially a trust
structure. This means that a limited number of trustees will have ultimate
independent authority in terms of the operation of the Charitable Trust. A
Charitable Trust type structure may be more appropriate where the
organisation has specific goals that it intends to meet through its activities
rather than serving as an umbrella organisation for a large number of people
with shared interests or goals whose number may change from time to time,
which is the type of situation when an incorporated society may be a more
appropriate structure.
What makes a trust a “Charitable Trust”?
To qualify as a Charitable Trust a trust would have to have certain objects that
the law regards as charitable. Unfortunately the legal definition of what is
charitable can differ from how the word ‘charitable’ is often understood in
common practice. So for instance a non-profit organisation with what most
people would consider good and worthy objectives may not necessarily qualify
as being charitable in the eyes of the law. The number of people who will
benefit from the activities of the trust and how they qualify to receive any such
benefits will also help to determine whether a trust is truly set up for a
charitable purpose in the eyes of the law. For more specific information on
setting up and running a Charitable Trust please refer to the Societies and
Trusts website at www.societies.govt.nz.
What is the benefit of having “Charitable” status?
Aside from the practical benefits of perhaps being able to access certain
funding and grants that would not be available to a non-charitable
organisation, charitable status also carries with it certain tax advantages such
as certain exemptions from having to pay income tax on income received by
the charitable entity.
Can only trusts have charitable status?
It is not just trusts that can acquire charitable status. For instance an
incorporated society if it meets the necessary legal and procedural
requirements could obtain charitable status and indeed there are a number of
incorporated societies who do have such charitable status.
How do I go about arranging for charitable status?
The way in which the charitable sector in New Zealand is overseen has
recently been changed by the Charities Act 2005. The Charities Act
established an organisation known as the Charities Commission that now has
chief responsibility for dealing with established and new organisations or
entities seeking charitable status in New Zealand. For anyone considering
establishing a charitable entity or seeking charitable status for an existing
entity, you should consult with a lawyer who has experience in this area. The
Charities Commission website (www.charities.govt.nz) also has a great deal
of useful information on applying for and maintaining charitable status as well
as its associated benefits.
How relevant is a non-profit type structure to my business?
Non-profit organisations are probably not appropriate for the average
“working” creative, however certain activities undertaken by groups of artists
or musicians may be well suited to a non-profit type structure, especially
where there is some emphasis on the cultural or community benefits which
may accrue from those activities.