Many independent contractors think that they have to register a limited liability company in order to trade.
This is a common misconception.
In fact, there is very little advantage of registering a company when you’re trading as an individual, and for some it can result in increased compliance costs and headaches. Here’s a quick guide to the most frequently asked questions.
1. Do you have to register a company to be a self-employed contractor?
No. It is often the case that self-employed contractors, freelancers and sole traders carry out their business as an individual, with no need to register a company.
As an individual, you can still:
- Register for GST
- Raise invoices
- Claim business and home office expenses
- Hire staff
- Depreciate assets
- Trade under a Trading Name
- Have your own website
- Rent a physical premises
- Get business cards
2. I’ve heard that it reduces my risk if I register a company, is this correct?
No. These days, despite them sometimes being called a ‘limited liability company’, registering a company does not necessarily reduce your risk if you are a contractor or freelancer.
Even despite a company structure, as the Director of a company you would still be responsible for the activities and actions of that company, and you would still be at risk of litigation. There is no option to ‘hide’ behind a company structure as a way of indemnifying yourself as an individual.
As an example, in November 2020 the Supreme Court found the director of a company in breach of his duty to act in good faith and in the best interests of his company; he was ordered to personally pay $280,000 to the company’s creditors.
If you work in a high-risk industry, or your client requires you to have further protections, you might want to look at taking out a Professional Indemnity or Public Liability policy.
3. Do I pay less tax if I pay myself through a company?
No. As an individual, the tax rates are all the same, whether you are paying yourself via a registered company, or as an individual.
It’s true that the Corporation Tax in New Zealand is a flat rate of 28%, which is lower than the individual top rate of tax, which is 39%. However, this does not mean that you as an individual can pay less tax by earning through a company. As soon as you take any money out of the company for yourself, you would pay the standard rates of individual income tax.
4. Do IRD and MBIE advise individual contractors and freelancers to register companies?
No. IRD and MBIE are currently going to great lengths to discourage individuals from unnecessarily registering companies. The advice from the government is very clear - that you should only register a company when necessary, and that for most freelancers and contractors, this is not required.
If in doubt, check out the MBIE’s Choose a Business Structure Tool on their website.
5. Can I stop trading as a company if I’ve registered one unnecessarily?
Yes. It’s quick and easy to stop trading through your company. You have a couple of options:
- You can make the company dormant, and trade as an individual instead. This gives you the option of ‘reviving’ the company at some point, should your business grow to the level of complexity where a company is required.
- You can close and ‘strike off’ the company from the Companies Office register, thereby closing the company entirely and ceasing the company from trading altogether. You can then continue trading as an individual instead.
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