Building Blocks
Why
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Some business structures attract investors and lenders more easily. Companies, for example, often have better access to funding than partnerships or sole traders.
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Different business types offer varying levels of liability protection. Limited liability companies generally protect owners' personal assets from business debts, while sole traders put those assets at greater risk.
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Business types have different tax responsibilities. Understanding these can help owners pick a structure that reduces tax costs, saving money and improving cash flow.
Understanding the distinctions between the different types of businesses helps you make informed decisions regarding their business structure, legal obligations, and financial strategies.
By identifying your business type, you can better use financial tools which helps simplify finance management and set your business up for success. Take a moment to evaluate your position and build strategies that work best for you.
Each year, over 50,000 new businesses are registered in NZ, each with its own structures and rules.
Each year, over 50,000 new businesses are registered in NZ, each with its own structures and rules.
What
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A sole trader is a person who runs their business on their own. They have full control but are also personally responsible for any debts or liabilities. Sole traders typically manage their own finances and have simpler tax obligations.
They do not have any employees.
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A company, on the other hand, is a separate legal entity. It can be owned by one or more people (shareholders), and the company itself is responsible for its debts. Companies often have more complex tax and reporting requirements and can raise capital through shares.
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Not-for-profit groups and charities, on the other hand, are organisations set up for a purpose other than making profit. Any surplus funds are reinvested into their cause rather than distributed to owners or shareholders. Charities, in particular, often enjoy certain tax exemptions and must comply with specific regulations to maintain their charitable status.
When you register your business you will need to define your business type. Each business type has its own unique challenges and opportunities, making it important to know yours for tax, legal requirements, and funding options.
The main distinction between sole traders or companies and not-for-profits or charities is their purpose. While sole traders and companies operate for profit, not-for-profits and charities focus on achieving community or charitable goals rather than generating profit. When comparing sole traders and companies the key differences are that sole traders are personally liable for their business, while companies offer limited liability protection, meaning the owners’ personal assets are separate from the business’s liabilities.
Meet Sarah a life long baker, here are 3 ways Sarah can share her talent
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Meet Sarah a life long baker, here are 3 ways Sarah can share her talent 🔷
One size does not fit all when it comes to your business
Dont feel limited by your specific trades or skills; instead, consider your options. You have the opportunity to explore and expand your potential beyond what you might think.
Meet Sarah as
Sole Trader
Let’s say you are a Sole Trader named Sarah, and you’ve been baking cakes from home as a hobby for a few years. Your friends and family love your cakes, and recently, more people have been asking if you could bake for events like birthdays and weddings. You decide to turn this into a small business.
As a sole trader, Sarah’s business structure is simple and allows her to run the business in her own name, with full control over decision-making. She is responsible for all aspects of the business, including sourcing ingredients, baking, managing customer orders, pricing, and marketing. Sarah also handles the bookkeeping and filing taxes as an individual rather than as a company. This structure gives her flexibility and allows her to keep things simple without the complexities of registering as a company. However, it also means she is personally liable for any debts or losses the business might incur.
This is an example of how a sole trader runs their business independently while balancing both opportunities and risks.
Growth is a positive sign, lean into it with confidence
Let your business evolve naturally over time, adapting to the changing landscape and embracing new opportunities as they arise. This can lead to sustainable success and a thriving enterprise in the long run.
Meet Sarah as
Limited Liability Company
Let’s say Sarah has been running her cake-baking business as a sole trader for a few years. Her homemade cakes are a hit, and demand has grown to the point where she’s consistently booking events and special orders. Realising it’s time to expand her operations, Sarah decides to take her business to the next level by hiring a small team and moving production into a commercial kitchen. To support her growth plans, she registers her business as a Limited Liability Company.
As a company, Sarah’s cake business now operates as its own legal entity, separate from her personal finances. This change provides Sarah with limited liability, meaning her personal assets are better protected if the business encounters financial challenges. She can also more easily track business finances, hire employees, and even seek potential investors if she wants to grow further.
This structure supports her goals to scale her business while managing risks, and Sarah now has a solid foundation to turn her passion for baking into a thriving company.
Stay flexible and adapt to change and new opportunities.
Your business will undoubtedly grow and thrive when you leverage the right tools and strategies to enhance your operations and financial management. With the right approach, you can unlock new opportunities for expansion and success.
Meet Sarah in
Non Profit
Now Sarah has been baking cakes for years, bringing joy to family, friends, and local events. As her business grew, she saw how her cakes brightened people’s lives and began wondering how she could give back to her community in a meaningful way. Inspired to make a difference, Sarah decides to transition her business into a not-for-profit organisation dedicated to supporting local causes and providing cakes for community events, fundraisers, and charity initiatives.
As a not-for-profit, Sarah's organisation focuses on reinvesting any earnings back into its mission rather than generating profit. She operates with the goal of spreading kindness and uplifting her community through her passion for baking. Now, instead of focusing on profit, Sarah spends her time organising donations, collaborating with volunteers, and finding sustainable ways to fund ingredients and supplies. Her cakes are no longer just a business but a tool for positive impact, supporting local causes and making celebrations more meaningful for people in need.
Conclusion
One size does not fit all when it comes to business, you are not limited by your specific trades or skills; instead, you have the opportunity to explore and expand your potential beyond what you might initially think. The best way to define your business is to make a Business Plan, this allows you to see the full picture of your business or organisation over the next 3 years.
Your Business Plan explains how you will operate, earn revenue, and handle expenses and most importantly clarifies roles and processes in your organisation.
Regularly updating your plan to include new insights and adjustments is crucial for staying relevant and achieving long-term success.
SOLE TRADER
NOT-FOR-PROFIT
SMALL BUSINESS