Sole Trader vs Company: Tax & Liability Comparison NZ
Two questions decide most NZ business structure choices: how much profit are you keeping in the business, and how much liability are you willing to carry? The 28% company rate vs marginal personal rates is half the picture — imputation credits and ACC treatment shape the rest.
Sole trader vs company at a glance
| Feature | Sole trader | NZ limited company |
|---|---|---|
| Income tax rate | 10.5% – 39% (marginal) | 28% flat |
| ACC | ClassicCover earner + work levy on net profit | PAYE-based on shareholder salary; company pays employer ACC |
| Liability | Unlimited personal | Limited to share capital |
| Tax return | IR3 (one return) | IR4 (company) + IR3 (you) + possibly IR4S |
| Setup cost | IRD number only | Companies Office $150 + $40/year |
| Annual compliance cost | ~$500–$1,500 (accountant) | ~$1,500–$3,500 |
| Imputation credits available? | No (not applicable) | Yes — pass-through to shareholder |
| Loss treatment | Can offset against PAYE income | Trapped in company until profit returns |
| Sale of business | Asset sale only | Share sale option (CGT generally nil) |
Tax on $120,000 profit — worked example
| Scenario | Tax | Notes |
|---|---|---|
| Sole trader, all drawn personally | ~$28,500 | Marginal rates 10.5%/17.5%/30%/33% + ACC |
| Company, all paid as salary | ~$28,500 | Same as sole trader; company taxes the wage as expense |
| Company, all profit retained at 28% | $33,600 | Higher upfront, but cash stays in business |
| Company, $60k salary + $60k profit retained | ~$26,800 | Hybrid: lowers personal marginal exposure, retains capital |
Run your own numbers with the Company Tax Calculator and the Sole Trader Tax Calculator.
Liability — the part most people underestimate
A sole trader's personal assets — house, savings, KiwiSaver (limited protection) — are exposed to:
- Trade creditors who don't get paid
- Customer claims (negligence, defective work, IP infringement)
- Employee claims and ACC excess
- IRD itself (PAYE / GST trust money is always personal)
- Tenancy and equipment leases personally signed
A company puts a legal wall around all of these (except director-duty breaches and PAYE/GST, which always pierce the veil). For service businesses with low capital risk, sole-trader liability is often manageable with insurance. For businesses holding inventory, leases, or staff, the limited-liability protection alone can justify incorporating well before the tax saving kicks in.
When to switch from sole trader to company
- Profit consistently above $80k–$100k — Above this threshold the 28%-vs-marginal arithmetic starts to matter, especially if you're retaining earnings.
- You're hiring staff — Companies handle PAYE/employee claims more cleanly.
- You're taking on significant lease, inventory, or capital exposure — Liability protection becomes critical.
- You're planning an exit — Share sales are easier than asset sales and may have favourable CGT treatment.
- You're attracting investors — Equity capital requires a company.
Related tools
Frequently asked questions
What's the headline tax difference between a sole trader and an NZ limited company?
Sole traders pay tax on net profit at their personal marginal rates (10.5%–39%) plus ACC. NZ limited companies pay a flat 28% company tax on profit. Above ~$78,100 of profit, the company rate is lower than the marginal rate — but the saving only crystallises if you leave money in the company instead of paying it out as salary or dividend.
When does a company structure save tax?
A company genuinely saves tax when you re-invest profit instead of taking it as personal income. If you draw all the profit as salary or fully imputed dividends, your effective rate matches your sole-trader rate (because imputation credits flow through). The structural advantage is retaining earnings inside the company at 28%.
What's an imputation credit?
When a company pays its 28% tax and then distributes profit as a dividend, it attaches an imputation credit equal to the company tax already paid. The shareholder grosses up the dividend and claims the credit against their personal tax — preventing double taxation. A 39% earner receiving fully imputed dividends pays 11% top-up; a 28% earner pays nothing extra.
How is ACC different?
Sole traders pay ACC ClassicCover (earner levy + work levy) on net self-employment income, calculated annually after the year ends. Company shareholder-employees pay PAYE on their salary (which includes ACC at 1.67%) and the company pays employer ACC on the salary. Non-shareholder-paid director fees can avoid ACC, but most owner-operators take a salary.
What about liability protection?
A sole trader has unlimited personal liability — your house, savings, and assets are exposed to business creditors and lawsuits. A limited company has separate legal personality, so the company's debts are the company's debts. Directors can still be held personally liable for breaches of duty, unpaid PAYE/GST trust money, and personal guarantees.
What does it cost to run a company vs a sole trader?
Sole traders need an IRD number, possibly GST registration ($60,000+ turnover), and an IR3 each year. Companies require Companies Office registration ($150 + $40/year), separate company books, an IR4 return, possibly an IR4S shareholder remuneration return, and usually higher accountant fees. Budget $1,500–$3,000 more per year in compliance.
Can I be both — a sole trader who incorporates later?
Yes, and many do. Common path: start as a sole trader to test the market, then incorporate when net profit consistently exceeds $80k–$100k. Transferring goodwill/assets to the new company has GST and depreciation consequences — get accounting advice before the switch.
Does the 39% top rate above $180,000 change the calculus?
Yes. The 11-percentage-point gap between 28% (company) and 39% (top personal) is the main motivation for incorporating high-margin consulting and IP businesses. But anti-avoidance rules (attribution of personal services income, GAAR) target arrangements where a company is interposed solely to drop the rate from 39% to 28%. Substance matters.