Company Tax vs Sole Trader: Choosing the Right Business Structure in NZ
Compare the tax implications of operating as a sole trader versus a company in New Zealand for 2025-26, including rates, admin costs, and when each structure wins.
Published 10 April 2026 · Reviewed by NZ Tax Tools Editorial Desk
The Two Main Options
When you start a business in New Zealand, the structure you choose determines how your profits are taxed, what paperwork you file, and your personal liability.
The two most common structures are:
| Feature | Sole Trader | Company (NZ Ltd) |
|---|---|---|
| Tax rate | Personal rates (10.5% – 39%) | Flat 28% on company profits |
| Legal entity | You = the business | Separate legal person |
| Liability | Unlimited personal liability | Limited to company assets |
| Setup cost | Free (just start trading) | $115 Companies Office registration |
| Annual filing | IR3 tax return | Company IR4 return + annual return ($53) |
| ACC | Earners’ + working safer levies | Same, but on shareholder-salary |
| GST | Required if turnover > $60,000 | Same threshold |
How Each Structure Is Taxed
Sole trader
All business profit flows directly to your personal tax return. You pay tax at your marginal rate:
| Taxable income | Rate |
|---|---|
| $0 – $15,600 | 10.5% |
| $15,601 – $53,500 | 17.5% |
| $53,501 – $78,100 | 30% |
| $78,101 – $180,000 | 33% |
| $180,001+ | 39% |
Company
The company pays a flat 28% tax on all profits. You then have three main ways to extract money:
- Shareholder salary: Deductible for the company, taxed at your personal rates
- Dividends: Paid from after-tax profits, with imputation credits attached
- Drawings against a current account: Must be managed carefully to avoid deemed dividends
Most owner-operators use a combination of salary and dividends to optimise their overall tax position.
When the Company Structure Wins
The 28% company rate becomes advantageous when your personal marginal rate exceeds 28%. That happens at $53,501 (where the 30% rate begins). But the real savings come when you can retain profits in the company rather than drawing them all out.
Scenario: $120,000 business profit
| Sole Trader | Company | |
|---|---|---|
| Business profit | $120,000 | $120,000 |
| Company tax (28%) | — | — |
| Shareholder salary | — | $70,000 |
| Company taxable profit | — | $50,000 |
| Company tax on $50,000 | — | $14,000 |
| Personal tax on $120,000 | $27,460 | — |
| Personal tax on $70,000 salary | — | $14,020 |
| Total tax | $27,460 | $28,020 |
Wait — the company option is slightly more expensive? That’s because we’re extracting most of the profit. The company wins when you retain earnings:
| Company (retain $50k) | Company (dividend $50k) | |
|---|---|---|
| Company tax | $14,000 | $14,000 |
| Personal tax (salary) | $14,020 | $14,020 |
| Dividend tax (top-up to 33%) | — | $2,500 |
| Total tax | $28,020 | $30,520 |
| Cash retained in company | $36,000 | $0 |
If you retain the $50,000 in the company for future investment or business growth, you’ve deferred $2,500 in personal tax. Over multiple years, this deferral compounds.
When the Sole Trader Wins
For most Kiwis earning under $70,000 from their business, staying as a sole trader is simpler and often cheaper:
- Your effective tax rate on $70,000 is about 20% — well below the 28% company rate
- No company registration, annual return fees, or separate accounting
- No complexity around shareholder salaries and dividends
- Losses flow directly to your personal return (useful in early years)
Look-Through Companies (LTCs)
An LTC is a hybrid: it has the limited liability of a company, but profits and losses flow through to shareholders’ personal returns — like a sole trader for tax purposes.
LTCs suit businesses that:
- Want limited liability but have owners in the 28% or lower bracket
- Expect early-year losses they want to offset against personal income
- Have five or fewer shareholders (all natural persons or other LTCs)
Note: LTCs can’t retain profits at 28% — all income is taxed at personal rates.
Key Takeaways
- Under $70,000 profit: Sole trader is usually simpler and cheaper
- $70,000 – $120,000: Company may help, but mainly if you can retain profits
- Above $120,000: Company structure increasingly valuable for tax deferral
- The company rate is 28% — you save when your marginal rate exceeds this and you retain earnings
- Don’t forget the admin costs: company returns, accounting fees, and annual filing add $1,000–$3,000/year
- LTCs offer a middle ground with limited liability and personal tax rates
Use the company tax calculator and sole trader tax calculator to compare your specific situation.