Starting a business in New Zealand – Types of structures Reading Answers

Starting a business in New Zealand – Types of structures

Did you know there are a few different ways you can structure your business? It’s possible to do business in New Zealand under one of three basic types of business structure. Each offers varying degrees of control and responsibility.

Sole Traders

If you’re a sole trader, your business is built around you. The entire operation relies on you, but you can still employ others to help you. You’re 100% accountable for your business’ liabilities, but you also retain full control of the business and its profits. Many small business owners start out as sole traders, because sole traders aren’t required to spend money following any formal or legal processes to establish their business, unlike companies. This is because sole traders and their businesses are considered to be the same legal entity.

Partnerships

A partnership is when two or more people or entities join together to pool their assets and divide the profits and liabilities in a business. They often bring different skills to the table and varying resources, with the division of profits and liabilities in addition to individual roles and responsibilities – outlined in a partnership agreement. Individuals are liable for their own debts and you can also be liable for business debts incurred by your partners if they become insolvent.

Companies

Companies are separate legal entities to their shareholders. This provides shareholders with limited liability from any of the business’ debts beyond the value of their shares in the company. However, if a shareholder is involved in the running of the business (as a director, for example), and he or she is found to have traded recklessly, fraudulently or not in the company’s best interests, they can still be made liable. Most financial lenders will also only give a business loan in exchange for a personal guarantee overriding limited liability. Shareholder dividends undergo taxation at a different rate to the company itself. All companies have to declare their director and shareholder details by registering for incorporation with the Companies Office.

Questions 1-6

Sole Traders

The owner is the business but can take on employees. Owner is wholly responsible for 1 ______________business operations and profits. A good way to start due to less red tape – owner and business are the 2  ______________.

Partnerships

Two or more people combine and 3  ______________, share profits and losses. All aspects of a partnership summarized in a partnership agreement. If a partner is 4  ______________ the other is responsible for all debts.

Companies

Separate from shareholders – creates limited liability (unless shareholder takes part in running the company and is doing so poorly). Moneylenders often only offer loans when there is a 5  ______________. Shareholder income is subject to different 6  ______________. Companies must declare various company details at the Companies Office.

Reading answers

1 Answer: Liabilities

Question type: Sentence completion

Answer location: Paragraph 2, lines 2-3

Answer explanation: It is mentioned that owners are 100% accountable (wholly responsible) for your business’ liabilities, but you also retain full control of the business (business operations) and its profits. Hence, liabilities is the answer.

2 Answer: Same legal entity

Question type: Sentence completion

Answer location: Paragraph 2, lines 3-6

Answer explanation: It is stated that many small business owners start out as sole traders, because sole traders aren’t required to spend money following any formal or legal processes to establish their business, unlike companies. This is because sole traders and their businesses are considered to be the same legal entity. These lines mention that being sole traders is a good way to start as they need not engage in any legal processes or paperwork (red tape) to establish their business since the business and the owner are the same legal entity. Hence, same legal entity is the answer.

3 Answer: Assets

Question type: Sentence completion

Answer location: Paragraph 3, line 1

Answer explanation: In the above mentioned lines, it is stated that a partnership is when two or more people or entities join together to pool their assets and divide (share) the profits and liabilities (losses) in a business. As partnerships are the result of two or more people pooling their assets, the answer is assets.

4 Answer: Insolvent

Question type: Sentence completion

Answer location: Paragraph 3, lines 5-6

Answer explanation: It is mentioned that individuals are also liable (responsible) for business debts incurred by your partners if they become insolvent. From this statement, it is quite clear that the answer is insolvent.

5 Answer: guarantee/personal guarantee

Question type: Sentence completion

Answer location: Paragraph 4, lines 5-6

Answer explanation: It is stated in the passage that most financial lenders (moneylenders) will also only give a business loan in exchange for a personal guarantee overriding limited liability. As the moneylenders offer loans only when there is a personal guarantee, hence, guarantee/personal guarantee is the answer.

6 Answer: Taxation

Question type: Sentence completion

Answer location: Paragraph 4, line 7

Answer explanation: In the above mentioned lines, it is clearly stated that shareholder income is subjected to taxation at a rate different from the company. Hence, taxation is the answer.