There are three main types of business structures in New Zealand to choose from when purchasing a business and the type of structure you use will be determined by the needs you have and which structure will best suit your individual circumstances.
1) Sole Trader
A sole trader operates the business on his or her own. This is easy to set up in that there are no legal requirements for registration or formal processes to follow. The owner in this business structure does everything themselves controlling, owning and managing the business. They are entitled to employ staff to help run the business but are entitled to all profits and are personally liable for all taxes and debts.
There are some disadvantage to this structure including that you have unlimited liability for your debts which may put your personal assets at risk. It can also be harder to secure loans or investors in the business and the sole trade structure can only last for the lifetime of the person.
Partnerships are where two or more people run the business together. Each partner shares responsibility for running the business shares the profits and shares the liabilities. Partnerships are usually formed with a formal partnership agreement. The profits from a partnership are not taxed in the partnership but are distributed to the partners as per the partnership agreement and taxed as individual income for that person.
The partnership structure is not as common as in the past as more people are now able to use a company structure. One of the disadvantages of a partnership is that each partner is liable for all debts within the partnership even those incurred by another partner and thus may put personal assets at risk. Also if there is a conflict within the partnership, a partner wishes to leave or a partner dies it can cause problems in the running of the business.
3) Limited Liability Company
A company is a formal and legal entity in its own right and is separate from its shareholders (group of people who own the company. Because of the formal structure the company governs the relationship between shareholders, directors and creditors and so usually fosters more confidence in a business than the previous two structures.
The liability of the shareholders is limited to their stake within the company, unless they have given personal guarantees, the company has traded while insolvent or has been trading recklessly, and so provides more protection for investors. This can make it easier to attract investors or loans. It is important for directors to clearly understand their responsibilities under the company structure though as the limited liability can be eroded by personal guarantees.
These are the three main company structures but there are other structures which may be relevant to your personal situation. It is very important when purchasing a business that you consult with your professional such as accountant or lawyer to determine which is the best option for you.
Information Sources: http://www.business.govt.nz/companies