ADVANTAGES AND DISADVANTAGES OF A COMPANY

Advantages of a company:
1. Limited Liability
One of the main advantages of forming a company is that the shareholders (owners) have no liability for the company’s debts. But if a shareholder has not paid the issue price for his shares and the company goes into liquidation, creditors could ask him to pay for his shares at that stage. If you start your company with 100 shares issued for $1.00 each, then the maximum amount that the shareholders could be liable for would be $100. This is a good reason for not starting your company with a million shares.
2. Separate legal entity:
The company is separate from you and any business partners you may have. It runs its own bank accounts and owns its own assets. The customers are making deals with the company, not with you personally. This helps to maintain the important gap between your personal and your business matters.
3. Convenient sale:
A Company and its assets can be sold by a sale of the shares. At its simplest, this involves filling out a form which is available for .50c at Whitcoulls. Any other form of business would need to be sold by the individual sale of each asset.
4. Employing Relatives:
A company may employ anyone, including relatives of the shareholders. But the rate of pay must be reasonable or the IRD will object. Sole traders must get the IRD’s permission before paying spouses.
5. Name protection:
Once your company is registered no-one else may use that name or a nearly identical name. So it provides some protection but if your name is important to you, consider having it protected by trade mark as well.
6. Continuity:
The company can continue even if one of the founders leaves, or a new “partner” comes in. For sole traders or partnerships, a change in personnel means the dissolution of the organisation.
7. Tax saving:
There are some advantages to be gained, but not as many as you might hope. Check with an accountant. The top individual tax rate in NZ in 2003 is 39%, the flat tax rate for companies is 33%

Disadvantages:
1. Financial statements:
Because the company is a separate legal entity, it must keep its own set of financial statements and file its own IRD tax returns. However, as most business failures are caused by poor record-keeping, this requirement is probably more of an advantage than a disadvantage.
2. Record-keeping:
Every time a Director, shareholder or the Registered Office of the company changes, you must officially notify the Companies Office. But Standard Companies Ltd now provides a computer programme with each of its companies which makes this task quicker and easier than before.
3. Annual Return:
Once a year the Companies Office will send you a form which lists the names and addresses of the company, its directors and shareholders. You must return this form to the Companies Office with a filing fee of $15.00.

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