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4 posts

Wannabe Geek


# 259838 24-Oct-2019 15:49
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I've been considering going into contracting and my research on the best structure has conflicting messages.

 

Accountants I've spoken to say I should set up as a company but I can't see why that makes sense.

 

My suspicion is that they want to make my life as complex as possible so they can make me use & pay for Xero and file company AND personal tax returns?

 

They said I would get a lower tax rate but I see that if I take drawings then the the IRD will tax me on that as personal income?

 

Also Xero and Accountants seem a bit over the top when all I'll be doing is claiming a few business expenses and putting in a invoice every month.

 

I have recently seen Hnry.co.nz and these guys seem too good to be true.

 

I spoke to them and they're the real deal and were super helpful

 

Has anyone got any experience with them?

 

 

 

I think the myths around starting a company are based on someone else profiting from my ignorance!

 

https://hnry.co.nz/freelancer-resources/guide-to-being-a-contractor

 

 

 

 

 

 


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  # 2343120 24-Oct-2019 16:10
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When I last asked about it, the company made it easier to keep IP you generate seperate and able to transfer the whole company if you sell it was the biggest benifit. Also if you wanted to take on additional shareholders etc, which just a simple labour for hire contracting thing wont need.





Richard rich.ms

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  # 2343121 24-Oct-2019 16:13
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I personally wouldn't bother.

 

I went with a company when contracting and there was zero benefit. I finished contracting now, gone back to perm, and closing the company down was a hassle of paper work etc


 
 
 
 


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  # 2343125 24-Oct-2019 16:14
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Hnry are well recommended in the entrepreneur groups I'm part of.

 

Not an accountant, but I've had a company since I was 18:

 

If you're not planning on doing procurement or services apart from your labour, and it will always just be you, Hnry is a great choice.

 

As soon as you want to buy and sell gear for customers, or buy services/gear to create/sell services, the accounting etc gets harder and a company makes more sense.





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Ultimate Geek


  # 2343149 24-Oct-2019 16:23
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Your obligations for record keeping as a sole trader really are quite simple. You no longer have to produce profit and loss / balance sheet accounts, all can be done with the appropriate IRD tax return. Note, whilst you don't have to get the financial accounts produced etc, you are still required to maintain proper records, including proof of all income and expenses, its just the format that you can choose.

 

There is limited value to a ltd liability company for a single shareholder / small contractor. Most creditors in business require personal guarantees before opening a trading account, and banks will absolutely want guarantees and other security for any business lending.

 

The annual costs of a company aren't significant, around $180 filing fee for annual return. There are costs to set up a company, I think about $1000 or so, but this can be reduced if you choose to set it up yourself.

 

You'll also need to gauge how much you expect to earn, if over $60k, you'll need to register for GST. Note, you can register for GST if you earn under $60k but its not a requirement.

 

Record keeping can be as simple as an excel workbook. You really don't need an accounting software package for just tracking a few simple transactions.

 

Income tab with details of invoices issued.

 

Expense tab with details of expenses incurred.

 

Keep copies of all documents in monthly file, collate them all at the end of the income / tax year and file IR3

 

If it were me, I'd set up a separate bank account from my personal day to day account, making sure I used it for all business income and expenses. Makes reconciling it to your excel sheet dead easy and provides backup records if required.

 

Tax laws have changed recently around payments to contractors, with "employers" required to deduct scheduler deductions (rate is set depending on type of service), so there are some tax matters to get your head around.

 

You'll also need to be wary of what expenses are claimed, personal use needs to be split out / adjusted for for certain expenditure (motor vehicle for example, claiming only a portion for business use based on 3 months log book record keeping) etc.

 

 


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Ultimate Geek


  # 2343180 24-Oct-2019 17:37
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iR run some helpful courses, for free, for those setting up in business. They have a useful cash book tool available for download.

 

if you are providing services and with no employee’s and no expensive assets, go for a sole trader - there is no advantage in running a company for one income stream.

 

Company Directors are still personally liable for malfeasance in running a company, Wellygary is not particularly correct on that point. I run a company and on an annual basis my lawyer reminds me of those obligations! So if, for example, the company failed to pay tax IR would probably have a go at the Directrs.





BlinkyBill


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  # 2343226 24-Oct-2019 20:28
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wellygary:

 

Having a company  gives you protection for your personal assets.

 

If you get involved in a dispute or conflict as a sole trader all your personal assets are able to be taken into account in settling damages actions etc (assuming no or limited insurance cover)

 

Setting up companies in NZ Is pretty easy and  they are not overly complicated to operate.

 

 

Not from banks or large creditors (e.g. placemakers) who require personal guarantees.

 

Maybe from the IRD

 

But be aware that if you are taking too much money out of the company as "drawings" (technically overdrawing your shareholders current account), that's technically monies you owe the company and the liquidator can go to you personal to recover it.

 

 

 

 


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Ultimate Geek


  # 2343366 25-Oct-2019 08:15
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Batman:

 

there are many advantages as a company

 

1. limited liability. if you get sued as a sole trader your entire life is bankrupted. if you get sued as a company your personal stuff is not touched unless you are sued personally for some criminal negligence or something.

 

2. company has a lower tax rate and your accountant can use that to your advantage. i still don't understand how it works but they will sort it out at the end of the year. if you make less your savings are less, if you make more your savings are more. so this may or may not be an advantage after applying all the accounting fees but in general you will be better off. a good accountant will find ways to save you money that you didn't know existed.

 

3. if you end up needing to register GST, a company can do that easy. if you personally need to register for GST all your personal asset may be liable for gst when you sell them (eg your house, car, etc)

 

4. it goes on and on.

 

just set up a company already.

 

my accountant made sure I was using the cheapest things and told me off using xero, said it's "very sexy" but i didn't need it

 

 

why post, if you don’t know what you are talking about?

 

1. It is expensive to sue. A sole trader is typically a single person income for services, not product, and doesn’t have assets; so unlikely to be worth the price of a lawsuit.

 

2. Lower for the company, yes; but as soon as you draw the money for yourself, you are back onto individual tax rates. So if you are a single person, and want to use the entirety of your revenue for yourself (instead of investing in growth, R&D etc) then value of a company is nothing.

 

3. Setting up for GST is the exact same process for a company or a sole trader. Only business assets and expenses are gst claimable and only business revenue attracts gst. don’t think you know how gst works.

 

4. No it doesn’t. There is no benefit to using a company unless you intend to employ people, or you have business assets of value. If you are a services-type of business with only yourself as a revenue stream, sole trader is the way to go.

 

i would change accountants if I were you.

 

 





BlinkyBill


 
 
 
 


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  # 2343367 25-Oct-2019 08:24
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Back in the 90's I did some contracting work. Set myself up for GST and just kept track of income and expenses. The accountant I talked to recommended just being a sole trader for the type of work I was doing but did insist I get public liability insurance (I'd recommend that too, covers your ass in case of accidents).


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  # 2343368 25-Oct-2019 08:35
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I was going to strongly suggest the OP get professional advice until I actually looked at Hnry..... wow what a great service!





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Ultimate Geek


  # 2343372 25-Oct-2019 08:58
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marpada:

 

Having a company allows some "creative" ways of avoiding tax.

 

 

no it doesn’t; there are allowable ways of avoiding tax, and not-allowed ways. The only was to “creatively” avoid tax would be to hire a specialist tax lawyer, transfer funds across multiple international companies, and take advantage of tax havens offshore.

 

not really worthwhile for a single-person income stream.

 

for context, my company of 100 employee’s, services business, pays 28% tax on business income and 33% tax on personal income, including my own as the owner of the business. There are no ways of reducing my tax and buying a flash boat with that money. And if I bought a flash boat for my business and used it for personal use I would probably be paying Fringe Benefits Tax on that usage.





BlinkyBill


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  # 2343417 25-Oct-2019 10:46
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You can dance around the fringes of tax planning a little bit

 

- income spreading if multiple family members are actively involved in the business you "can" apportion profit (wages) to them to take advantage of lower personal tax rates, but, it can't just be a payment for the purposes of minimising tax, it has to be based on work provided to the business (so, don't think you can list your kids as employees and pay them all $48k per year to reduce your tax). If your partner or family work legitimately in the business then this may be available, but if they don't, then this option is not available. You can also have multiple shareholders who legitimately own shares in the company and are entitled to dividends (so your family could own a portion each) but as owners of the business they also have rights and obligations (like selling off their shares) which may cause unintended consequences.

 

 - income deferral or bringing forward expenses, but only when it is justifiable to do so (e.g. project completion after balance date period, if it is normal to invoice at completion, this may be acceptable, but if you have a regular pattern of invoicing monthly, then not invoicing for work done is less likely to be acceptable).

 

 

 

 

 

Most NZ tax is done on a self assessment basis. The onus is on the tax payer to submit what they believe (or have records to prove) is their taxable income and expenses, this applies for income tax, GST, FBT, company tax.

 

The IRD may not specifically ask for records of each tax payers self assessment to confirm the bona-fides of the claim, this can leave things open to abuse by those who look to evade tax. I don't know the specific details, but I'm pretty certain the IRD has many tools at its disposal that would quickly highlight disparities between what is being declared and what is "normal". They wield a pretty decent stick when it comes to tax evasion with civil and criminal penalties at their disposal.

 

 


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  # 2343422 25-Oct-2019 10:58
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BlinkyBill:

 

2. Lower for the company, yes; but as soon as you draw the money for yourself, you are back onto individual tax rates. So if you are a single person, and want to use the entirety of your revenue for yourself (instead of investing in growth, R&D etc) then value of a company is nothing.

 

4. No it doesn’t. There is no benefit to using a company unless you intend to employ people, or you have business assets of value. If you are a services-type of business with only yourself as a revenue stream, sole trader is the way to go.

 

 

Agreed.

 

As a contractor you pretty much fall into both these points, making a company pointless. Whatever loopholes used to exist which made forming a company appealing, IRD pretty much closed them all

 

If I ever go contracting again I'll just be doing a sole trader, won't be wasting time setting up a company again.


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Ultimate Geek


  # 2343433 25-Oct-2019 11:12
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Batman:

 

BlinkyBill:

 

Batman:

 

there are many advantages as a company

 

1. limited liability. if you get sued as a sole trader your entire life is bankrupted. if you get sued as a company your personal stuff is not touched unless you are sued personally for some criminal negligence or something.

 

2. company has a lower tax rate and your accountant can use that to your advantage. i still don't understand how it works but they will sort it out at the end of the year. if you make less your savings are less, if you make more your savings are more. so this may or may not be an advantage after applying all the accounting fees but in general you will be better off. a good accountant will find ways to save you money that you didn't know existed.

 

3. if you end up needing to register GST, a company can do that easy. if you personally need to register for GST all your personal asset may be liable for gst when you sell them (eg your house, car, etc)

 

4. it goes on and on.

 

just set up a company already.

 

my accountant made sure I was using the cheapest things and told me off using xero, said it's "very sexy" but i didn't need it

 

 

why post, if you don’t know what you are talking about?

 

1. It is expensive to sue. A sole trader is typically a single person income for services, not product, and doesn’t have assets; so unlikely to be worth the price of a lawsuit.

 

2. Lower for the company, yes; but as soon as you draw the money for yourself, you are back onto individual tax rates. So if you are a single person, and want to use the entirety of your revenue for yourself (instead of investing in growth, R&D etc) then value of a company is nothing.

 

3. Setting up for GST is the exact same process for a company or a sole trader. Only business assets and expenses are gst claimable and only business revenue attracts gst. don’t think you know how gst works.

 

4. No it doesn’t. There is no benefit to using a company unless you intend to employ people, or you have business assets of value. If you are a services-type of business with only yourself as a revenue stream, sole trader is the way to go.

 

i would change accountants if I were you.

 

 

 

 

I suspect the truth is somewhere in the middle, with a big "it depends".

 

 

no it isn’t. The tax situation for sole traders vs company is extremely clear and pretty simple. If you are a single-person income stream with no significant business assets which are depreciable, then sole trader is the way to go. In this scenario, setting up a company is just additional cost and complexity.





BlinkyBill


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Ultimate Geek


  # 2343459 25-Oct-2019 12:01
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BlinkyBill:

 

Batman:

 

just wondering - are you an accountant by any chance?

 



 

no, but I am a Company Director (of my own company) and I employ an accountant, and a lawyer (not a specialist tax lawyer).

 

 

 

 

I am, and whilst blinkybills answers are somewhat simplified, they are not wrong.


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Ultimate Geek


  # 2343479 25-Oct-2019 12:21
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sen8or:

 

BlinkyBill:

 

Batman:

 

just wondering - are you an accountant by any chance?

 



 

no, but I am a Company Director (of my own company) and I employ an accountant, and a lawyer (not a specialist tax lawyer).

 

 

 

 

I am, and whilst blinkybills answers are somewhat simplified, they are not wrong.

 

 

i interpreted the OP’s situation as being pretty simple, indicating a Sole Trader mechanism would work best for that situation. If there is more complexity than I infer, then I am not qualified to advise - that would be best done by a professional.

 

I find it a disservice for people to make inaccurate statements that could be detrimental to someone, and paint them into unwarranted cost and stress.





BlinkyBill


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