Sole trader or limited company?

Every new NZ contractor meets this fork early, usually because someone at a barbecue insists they "must have a company." The honest answer is less exciting: most first-time contractors are best served starting as sole traders, and the company question becomes real later, at specific trigger points. This guide lays out what each structure actually is, what changes between them, and when the switch starts earning its overhead.

What being a sole trader means

A sole trader is you, trading as yourself. There's no registration, no separate legal entity, and no setup cost: you use your personal IRD number, tell Inland Revenue you're earning self-employed income, and start (the setup checklist covers the details). Your business profit is your personal income, taxed at your personal rates, and you and the business are legally the same person: business debts are your debts.

What a company changes

A limited company is a separate legal person that you own (as shareholder) and run (as director). Incorporation is quick and cheap by world standards: an online application to the Companies Office, around $130 plus GST all up, with a small annual confirmation fee after that. What you get for it:

• Limited liability.The company's debts are the company's, not yours, subject to real limits: personal guarantees (which banks and landlords routinely require from small companies) and director duties both reach through the shield.
• A 28% flat tax rate on retained profits. Money the company earns and keeps is taxed at 28%. Money paid out to you (usually as shareholder salary) is taxed at your personal rates, the same rates a sole trader pays. The company rate only helps on profit you can afford to leave in the company.
• Separation and signalling. Some larger clients and some industries simply prefer contracting with companies.

What it costs you:

• Admin that never ends.Company tax returns, the shareholder current account, minutes and resolutions for significant decisions, an annual return, and bookkeeping that keeps your money and the company's money strictly apart. Most contractors pay an accountant four figures a year for this.
• Less flexibility with your own money. As a sole trader, the business account is your account. In a company, taking money out has to be structured (salary, dividend, or a loan tracked through the current account), and doing it casually creates real tax problems.

The tax comparison, honestly

The 28% company rate against the 33% and 39% personal brackets looks like an obvious win. It usually isn't, for one reason: you need the money to live on. Profit paid out to you lands at your personal rates regardless of structure, so a contractor who spends what they earn gets little from the company rate. The genuine tax benefit arrives when you consistently earn more than you need, because retained profit is taxed at 28% instead of your top marginal rate. That's a high-earner's optimisation, not a starting-out move.

The real trigger points

Revisit the structure decision when any of these arrive:

• Sustained income well above your living costs, so retained earnings at 28% become meaningful.
• Real liability exposure: contracts where a mistake could cost more than your insurance covers.
• A client or industry that requires it: some engagements are only offered company-to-company.
• Bringing in someone else: a partner, an employee, or shared ownership needs the company machinery.

None of these on the horizon? The sole-trader answer keeps being right. Switching later is straightforward and accountants do it every week; incorporating early "to be safe" mostly buys admin.

How Coffer fits

Coffer is built for sole traders today: the tax math, ringfencing, and the yours-to-spend arithmetic all follow the sole-trader rules described in this guide. Support for limited companies, with the 28% rate and the shareholder current account, is on Coffer's roadmap. If you're starting as a sole trader, Coffer covers you from invoice one.