what is different for income tax obligations of a business as: sole trader , partnership and company?

Sole traders

A sole trader is a person trading on their own. They control, manage and own the business.

How does being a sole trader work?
A sole trader usually has no formal or legal processes to set up the business. The owner/manager is personally entitled to all profits, but is also personally liable for all business taxes and debts.

What are "drawings"?
If you are a sole trader you're probably not paying yourself a wage, but simply taking money from the business when you need it for personal use. These takings are called drawings. They are:

a part of your profit and taxed accordingly
not a deductible business expense when calculating your profit.
Record your drawings in your cashbook so that you can reconcile your cashbook with your bank statements, ensuring that there is enough money in the business to cover any bills owing.

What are the tax rates for sole traders?
A sole trader is taxed at the individual tax rates.

Example

Sales $177,000
less all deductible expenses $108,500
Net profit (taxable income) $68,500


To work out the tax to pay on $68,500 go to the individual tax rates.

Partnerships

In a partnership, two or more people run a business together. Each partner:

contributes something to the business, and
in return shares in any profit or loss, and
is also liable for any debt within the partnership.

How does a partnership work?
Stage Description
1
You can prepare a formal partnership agreement.

2
Limited partnerships must be registered with the Companies Office.

3
Partners share responsibility for running the business, and share the profits and losses equally, unless an agreement says otherwise.

4
The partnership distributes its income to the partners, who each pay tax on their own share.

5
The partnership itself does not pay income tax on its profits. Instead:

at the end of each year the net profit (without taking into account partners' drawings) is distributed between each partner

each partner then pays income tax on their share of the profit in their individual tax return, along with any other income they may have received.


Paying a salary or wage to a partner
If ... then you ... and they must ...
there is a bona fide contract in writing and agreed to by all partners

can pay a salary or wage to a partner, and
deduct PAYE
include the salary or wage in their Individual tax return (IR3) along with their share of any profit or loss from the partnership, and
claim the salary or wage as a deductible expense in the partnerships' Income tax return - partnerships (IR7).

Companies

Companies own the assets and liabilities of the business and are responsible for any debts. The shareholders' liability for losses is limited to their share of ownership in the company.

How do I form a company?
You register (incorporate) it under the Companies Act by:

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

What is the company tax rate?
Profits earned by a company are taxed at the company tax rate of:

30 cents in the dollar for income years 2009 and later.
33 cents in the dollar for income years 2008 and earlier.

Who pays income tax at the company rate?
The company tax rate (CTR) applies to all:

registered companies
cooperative companies
life insurance companies deadline
incorporated societies
portfolio investment entity (PIEs) that are not portfolio tax rate entities (See Tax rules for portfolio investment entities for a more detailed description.)
specific savings vehicles defined as being taxed at this rate in Schedule 1 of the Income Tax Act 2007.
unit trusts
statutory producer boards
group investment funds (except for certain income).
How can a company distribute its profits?
Companies can distribute money in three ways:

Method Description Tax responsibility
1
Shareholder-employees can periodically draw money from the company.
At the end of the year, the company calculates a salary amount on which the shareholder will have to pay income tax.

2
Shareholder-employees can be paid a regular salary (at least monthly) with PAYE taken out in the normal way.
These salaries are deductible as a business expense for the company.

3
The company can pay dividends to shareholders out of the profits that remain after tax.
The company may also attach tax credits to these dividends called imputation credits. See Imputation basics for more information.

Whenever a New Zealand company pays dividends to a New Zealand shareholder, the company must also deduct RWT to bring the total of RWT and imputation credits up to 33% of the gross dividend amount. See Tax on interest and dividends for more information