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Restructuring from sole trader to company.
Your business has grown beyond a one-person operation. Maybe you are taking on bigger contracts, want liability protection, or need a structure that can attract investment. Here's how to make the transition properly.
Signs it's time to incorporate.
Not every business needs to be a company. But if several of these apply to you, it's worth seriously considering.
Significant contracts
You are taking on larger contracts or liabilities that could expose personal assets if something goes wrong.
Partners or investors
You want to bring in business partners, investors, or issue shares to key employees.
Personal assets at risk
Your home, savings, or other personal assets are potentially exposed to business debts or claims.
Client expectations
Larger customers or suppliers expect to deal with a company, not an individual trader.
Succession planning
You are thinking about eventually selling the business or passing it on to family.
Tax efficiency
Your income is high enough that the 28% company rate could be more efficient than personal rates up to 39%.
Financial separation
You want clear separation between personal and business finances, assets, and obligations.
Brand identity
You are building a brand that exists independently of you and could outlive your involvement.
Sole trader vs company: what changes.
Understanding the key differences helps you make an informed decision about whether to incorporate.
| Sole Trader | Company | |
|---|---|---|
| Liability | Unlimited personal liability | Limited to company assets* |
| Tax rate | Personal rates (up to 39%) | 28% on company profits |
| Compliance | Minimal | Annual returns, financial statements |
| Perception | Individual operator | Corporate entity |
| Flexibility | Simple, quick decisions | Structured governance required |
| Selling the business | Sell assets individually | Sell shares or assets |
| Raising capital | Personal borrowing only | Issue shares, company borrowing |
*Director personal liability can arise in certain circumstances (reckless trading, tax defaults, H&S breaches). See our director duties article.
Tax implications of transition.
The transfer of a business from sole trader to company has tax consequences. With proper planning, most can be managed or deferred.
"Getting the tax treatment right at incorporation saves significant headaches later. Work with your accountant and lawyer together on this."
Rollover relief (Income Tax Act 2007)
Section CB 4 provides rollover relief when transferring revenue account property from a sole trader to a company. This can defer tax that would otherwise arise on the transfer.
Key requirement: You must hold the same percentage interest in the company as you held in the business. Work with your accountant to ensure the transfer qualifies.
GST considerations
If you are GST registered, the transfer of assets to the company is a taxable supply. However, section 11(1)(mb) of the Goods and Services Tax Act 1985 may allow zero-rating if the company is also GST registered.
Timing matters: Register the company for GST before transferring assets to avoid GST liability on the transfer.
Depreciation recovery
If assets are transferred at market value above their tax book value, depreciation recovery income may arise. This needs to be accounted for in your transition planning.
Planning opportunity: Consider the timing of depreciation claims and transfer values carefully.
Trading stock
Trading stock transfers to the company at market value, which becomes the company's opening value. This may create income for the sole trader depending on the valuation method previously used.
Step-by-step transition.
A structured approach ensures nothing falls through the cracks and minimises disruption to your business.
Form the company
- Reserve your company name with the Companies Office
- Register the company (Companies Act 1993)
- Consider a constitution for governance rules
- Apply for IRD number and GST registration
Transfer assets and contracts
- Prepare sale and purchase agreement for business assets
- Get valuations for assets being transferred
- Review existing contracts for assignment clauses
- Novate or assign contracts to the company
Notify stakeholders
- Inform customers and suppliers of the change
- Update invoicing and payment details
- Notify your bank and arrange new company accounts
- Contact your insurer about the new structure
Update registrations and records
- Transfer any licences, permits, or certifications
- Update trade mark registrations (if applicable)
- Register the company with ACC as an employer (if applicable)
- Update domain registrations and online accounts
Employment considerations
- If you have employees, transfer employment to the company
- Issue new employment agreements from the company
- Set up PAYE and employer obligations for the company
- Review ACC coverage for yourself as a working owner
Ongoing obligations as a company.
Running a company means ongoing compliance requirements. Factor these into your decision.
Annual returns
File an annual return with the Companies Office confirming company details remain accurate.
Director duties
Comply with director duties under the Companies Act 1993. Personal liability can arise from breaches.
Financial statements
Prepare annual financial statements. Some companies must have these audited or reviewed.
Tax obligations
File company income tax returns, GST returns, and PAYE if you have employees.
Common mistakes to avoid.
Transferring assets without understanding rollover relief, GST, or depreciation implications can create unexpected tax bills.
Many contracts require consent to assign. Operating under the company without proper assignment can leave you personally liable.
Using the company account as your personal account undermines limited liability. Keep finances separate from day one.
Insurance policies in your personal name may not cover the company. Update policies to reflect the new structure.
Accounting fees, annual returns, and compliance requirements add ongoing costs. Budget for these before incorporating.
Banks and landlords often require personal guarantees, which can erode the liability protection a company provides.
When NOT to incorporate
A company isn't right for everyone. Consider staying as a sole trader if:
Low-risk business: You are not exposed to significant liability or claims.
Lifestyle business: You are not planning to grow, sell, or bring in partners.
Low income: Earnings don't justify the compliance costs and complexity.
Personal services: Clients are hiring you specifically, and that won't change.
Temporary or side income: This is a short-term venture or secondary income source.
Consider discussing with your accountant whether the tax and compliance costs outweigh the benefits for your particular situation.
Key Takeaways
Incorporate when liability protection, growth, or tax efficiency justify the added compliance
Plan the tax implications carefully - rollover relief and GST treatment matter
Properly transfer contracts, update registrations, and notify stakeholders
Understand director duties - they're legal obligations with personal liability
Keep company and personal finances strictly separate from day one
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