Sole trader vs company NZ — tax structure decision

By the TaxAccountants.co.nz editorial team · Published 2026-06-06

A five-factor framework for the NZ sole-trader vs company question — tax rate, liability, set-up cost, compliance burden and profit retention — with the IRD sources behind each number. For a full worked walk-through with numbers across multiple profit levels, see the deep-dive comparison linked at the end.

Factor 1 — tax rate

Sole-trader profits land on your personal IR3 and are taxed across the five brackets: 10.5%, 17.5%, 30%, 33% and 39%. A NZ company pays a flat 28% on taxable profit. Below about $53,500 of personal income the sole-trader path is cheaper (effective rate runs under 28%); above the 33% bracket the company rate becomes meaningfully cheaper on retained earnings. Dividends paid out to shareholders are then taxed at the shareholder’s marginal rate, with imputation credits offsetting the 28% already paid. Source: IRD — income tax for businesses and organisations.

Factor 2 — liability

A sole trader is the business at law — personal assets (house, car, savings) sit behind business creditors and any successful claim. A NZ company is a separate legal person; shareholder liability is capped at the unpaid amount on their shares (typically zero for fully paid shares). Limited liability is the structural reason most businesses with employees, premises, or third-party contracts incorporate, independently of any tax-rate calculation.

Factor 3 — set-up cost

Sole-trader set-up is free — you start trading, register for GST at the threshold, and file an IR3 at year end. Company set-up requires a Companies Office incorporation (with a one-off registration fee and an ongoing annual-return fee), an IRD number for the company, GST and PAYE registrations if applicable, a shareholders’ agreement for multi-owner companies, and a constitution if you opt out of the default rules. Most accountants will do the incorporation plus first-year set-up as a fixed fee.

Factor 4 — compliance burden

A sole trader files one IR3 with a business schedule annually, plus GST returns if registered, plus PAYE returns if they hire staff. A company files an IR4 annually, a Companies Office annual return on a separate calendar, financial statements (a minimum-form set for small companies), shareholder and dividend records, and the same GST and PAYE returns as a sole trader. Annual accounting fees for a small company typically run two to three times a comparable sole trader. Source: IRD — income tax for businesses and organisations.

Factor 5 — retention of profits

Sole-trader profits hit your personal return in the year earned — there is no way to defer tax on retained earnings because there is no separate legal pot. A company can retain post-tax profit (after the 28% company tax) inside the entity for working capital or reinvestment without triggering further personal tax until dividends are paid out. That deferral is the strongest quantitative reason to incorporate once profits sit well above the 33% personal bracket. Source: IRD — provisional tax.

Quick worked sketch

On $120,000 of taxable profit: a sole trader pays roughly $30,520 in income tax (effective rate ~25.4%, marginal rate 33%). A company pays 28% × $120,000 = $33,600 of company tax, but only $0 of personal tax until the after-tax $86,400 is paid out as a dividend. If the owner retains all $86,400 for reinvestment, the company structure defers ~$3,080 of tax indefinitely. If the owner draws it all as a dividend, imputation credits flow through and the total tax converges with the sole-trader number. For a fuller walk-through across multiple profit levels with shareholder-salary planning, see our company vs sole trader deep-dive.

Related on TaxAccountants.co.nz

• NZ income tax calculator — model sole-trader profit at your bracket.
• NZ income tax rates 2026 — the personal scale that drives the sole-trader path.
• GST registration threshold — same trigger for both structures at $60,000.
• IR4 due date — what your filing calendar looks like once you incorporate.
• Company vs sole trader — deep-dive comparison — full worked numbers.