A sole trader structure is often a sensible way to test a new business. As the work, risk and profit grow, you may start asking when to change from sole trader to company in New Zealand. There is no single income number that makes the decision for everyone, so look at the whole picture.
Signals it may be time to review the structure
Consider a review when:
- contracts carry meaningful customer, product or professional risk
- you plan to bring in a co-owner or investor
- you want to retain profit in the business for growth
- customers or suppliers expect a company
- the business is hiring or holding valuable assets
- administration is becoming predictable enough to manage
A company can make ownership and contracts clearer, but it is not a substitute for insurance, good contracts or careful management.
Do not decide on tax rate alone
A company is generally taxed at 28%, while sole-trader profit is included in your individual return and taxed at individual rates. That comparison is incomplete. Consider how much profit you need personally, what salary or shareholder salary will be paid, whether dividends are planned and the cost of company administration.
If most of the profit is taken out to live on, a company may not produce the result you expect. If some profit can stay in the business for stock, staff or equipment, the cash-flow picture may be different. Model both options using realistic numbers.
Plan the changeover
Changing structure can involve a new IRD number, bank account, accounting file, contracts, invoices, assets, insurance and GST records. Decide the effective date and keep a clear list of what moves from the sole trader to the company.
Before the change:
- prepare up-to-date accounts
- identify unpaid invoices and bills
- reconcile GST and bank accounts
- document assets, loans and owner balances
- check contracts and insurance
- budget for Companies Office and accounting obligations
Do not move assets or continue invoicing through the wrong entity without checking the tax and legal treatment.
Review the structure annually
A structure that suits a new business may not suit a growing team. Review profit, risk, ownership, reinvestment and administration at least once a year, and before signing a major contract or adding a shareholder.
This is a general guide, not legal or tax advice. Get advice before changing the entity or transferring assets.
Make the next step practical
Use the ideas here as a starting point for a better conversation. The right answer depends on your records, timing and circumstances, so keep the assumptions visible and revisit them when something changes.