About companies

What is a company?

A company is a separate entity which is for the purposes of law a separate legal personality from the people who own it. The owners are called shareholders and their liability for the debts of the Company is generally limited to the paid up value of the shares they own in the company.

It is formed when a group of people exchange money and/or property for shares in an enterprise registered under the Companies Act. It is probably the most common form of business structure because it provides some advantages that one should look at when going into business.

It is also possibly the best entity to use if a business owner is serious about separating the family assets from the business. If the company fails, because it is a separate person it cannot call on the assets owned by the owners or their families.

Company is a separate legal entity

A company a legal structure a business owner can use to run their business through. It is the one legal entity that has more to do with complying with regulations and other aspects of the law than other business structures.

A company is known as a separate legal entity, which simply means it is recognised under law as a separate person. The company is separate from the shareholders (the people who have shares in it), so the company itself is a person, while the shareholders are separate people. The shareholders are not the business but they have shares in the business. The owners or shareholders in the company are merely holding an interest in the business

All owners or investors in a company are known as shareholders and they are generally not liable for the debts of the company. Their liability will be limited to the amounts still unpaid on the shares that they have taken out in the company.

What is a company with limited liability?

A limited liability company is a company which has limited liability. This means that the personal liability of the people involved in the business is limited to the extent granted by law.

In the case of shareholders, their liability is limited to the amount still unpaid on the shares they have taken in the company.

In the case of directors and officers of the company, their liability is limited to the extent where there is no liability provided they have complied with all the requirements set down under company law, as to their duties and responsibilities.

The limited company is treated as a person in law, so it is responsible for its own debts. Creditors can claim the assets owned by the limited liability company, but not the assets of the officers of the company, nor its shareholders. Only the property of the limited liability company can be used to clear the debts if it becomes insolvent and eventually wound up.

The officers and shareholders of the company, employees and investors in the company cannot be made to contribute to the debts of the company. This ensures that they cannot be made personally bankrupt because the company fails.

This limitation of liability does not extend to a business structure such as a sole trader or partnership where creditors can claim all the assets belonging to the owners of those businesses if their debts have not been satisfied.

It means the owners of a business trading as a sole trader or partnership can be made personally liable and therefore personally bankrupt if the business fails and creditors are owed money.

Forming a company

If you are looking at forming a company you will need to provide the following information:

  • A name.
  • At least one shareholder.
  • At least one share.
  • At least one director.
  • A registered address.
  • An address for serving legal documents.

The following are the 3 steps if you want to incorporate a company:

Step 1: reserve a name

The first thing to do is reserve a name for your proposed company. You can download the necessary forms from the NZ Companies Office web site (www.companies.govt.nz) or you can buy the necessary forms from various stationers. All you need to do is complete the application form and return it to the NZ Companies Office with the appropriate payments. You can apply electronically by going to the NZ Companies Office web site.

When looking at reserving a name, you should provide two alternatives in case one of them has already been taken or is not accepted. The registrar will send you a notice telling you if your name as been reserved and if so it will be held for 20 working days from the date stated in the notice. You then have to form your company within that time; otherwise you will lose your name.

Reserving a name online through the company web site is generally the quickest and most efficient method and is actually cheaper at $15. Reserving your name through the normal paper process is $25. The Companies Office says they can turn around an online application within five to ten minutes.

Step 2: Register the company

When you go to register your company you have to lodge the following documents:

  • An application for registration.
  • Consents of the directors and shareholders that they are prepared to act as directors and shareholders in the company.
  • Non-disqualification certificates for the directors. These certificates say that the individuals concerned are able to be in business legally. – (That is, they are not undischarged bankrupts or banned from conducting a business for some reason.) These certificates are on the same form as the consents.
  • The name reservation notice you have received from the NZ Companies Office.
  • A constitution if you are setting up your own. (If you don’t have a constitution you will automatically come under the constitution in the Companies Act.)
  • A fee of $100. (If you are registering electronically it will cost you $70 and payment will be by credit card.)
  • All these documents are available as templates from the NZ Companies Office.

Step 3: Finalise incorporation

The whole process can be done by post, by personal delivery, or electronically. If you are registering electronically the application will be sent electronically via the NZ Companies Office web site and you will have to fax through to them the signed directors and shareholders consent forms.

Once the NZ Companies Office receives this, the documentation is processed and your company will be incorporated. Then an incorporation certificate will be sent to you online, or by post.

Advantages of companies

Some advantages of companies include:

  1. Limited Liability (Ltd). The concept of Limited Liability means that the liability of the shareholders in the company is limited in the event of a winding up or liquidation of the amount still owing on their shares. If you have taken out $1000 worth of shares in a company and $500 is still as yet unpaid then in the event of a winding up or liquidation of the operations the liability is limited to the amount still unpaid on the shares which would be $500.
  2. The continuity of the business is not affected by the death or bankruptcy of its members
  3. Shares can be easily transferred or gifted with very little cost
  4. Provisions have been enacted to allow the transfer of tax losses between companies
  5. The government has introduced a full imputation system for dividends distributed to shareholders.
  6. It is easier to arrange borrowing from banks and lending institutions through a company by offering a charge over the assets of the company by way of a debenture etc.
  7. The company structure is an excellent “tax planners tool” allowing your tax adviser to arrange your affairs in such a way that the maximum tax benefits are obtained.

Disadvantages of companies

Some disadvantages of a company are:

  1. Inflexible nature. The degree of flexibility is dependent on how the company was formed.
  2. Formality. The Companies Act requires a high degree of formality and the requirements and standards that a company has to fulfil are always rising.
  3. High Taxation. A company as a separate legal entity pays tax on it profits at a flat rate of 33 cents in the $.
  4. Cost. A company structure is considerably more expensive to set up and operate especially in the light of ever increasing company filing fees.

What a company gives you

  1. Security– It allows you to secure your private assets from the consequences of business failure. Many of you would say perhaps that today in light of many lenders requiring private company shareholders to give personal guarantees, that this is now not as advantageous. This is correct, but we submit that in the area of trade creditors there are still advantages in having the protection of limited liability.
  2. Control – It allows people, because of its structure to control their affairs without owning their business entirely themselves. Companies by the use of non-voting shares can effectively allow the capital to remain in one set of hands while the control remains in another. This is an essential advantage from the tax planner’s point of view. If companies control the splitting ability it can be used so that as a company grows the accretion in value to the assets due to:
    1. Inflation
    2. Retaining earnings
    3. Gifting Programmes

Can be legally passed to and held by one group of shareholders while the control remains in some other group’s hands.

  1. Tax Status – A company is for taxation purposes a separate legal entity and is taxed as such. This means that people forming a company have created another tax entity (and is taxed as such) for themselves outside of spouse and family which can be used for tax planning purposes.

What are “public” and “private” companies?

The matter of whether a company is a public company or a private company is important for tax purposes because tax treatment of particular transactions differs depending on the status.

  • Public: A public company is one that meets certain criteria such as stock exchange listing.
  • Private: A private company is any company that is not a public company.

N.Z company law changes

From 1 July 1994, company tax changed to a line up with the company law reforms enacted in the Companies Act 1993.

The principle company law reforms that affect the treatment of companies include:

  • Companies were permitted to repurchase their own shares.
  • Companies could redeem share capital without the approval of the court.
  • The amalgamation of companies was simplified.
  • Shares were no longer required to have a nominal or par value.
  • The company was required to have a constitution rather than a memorandum and article of association.

One of the main areas affected by the changes in tax was the reforms that related to the dividend provisions as to returns of capital and repurchase of shares, as well as the provision of roll-over relief for asset and liability transfers between amalgamating companies.

Look-through companies (LTCs)

LTCs are a special sort of company that is “looked-through” for income tax purposes.

The shareholders of the LTC become liable for income tax on the LTC’s profits, while also being able to offset the LTC’s losses against any other income.

Each owner:

  • is responsible for declaring the income on their individual income tax return
  • will be liable for any tax payable on their LTC income at their marginal tax rate
  • is regarded for income tax purposes as holding the LTC’s assets directly and carrying on the activities of the LTC personally

How do you form a company?

You register (incorporate) your company under the Companies Act by:

  • contacting the Companies Office, and
  • paying for a legal registration process

Registering a company is relatively easy by following the simple steps set out above or by going to  the NZ Companies Office website – https://www.companiesoffice.govt.nz/companies