What is a Limited Liability Company in New Zealand?
Published: July 17, 2023
Read Time: 9 minutes
A limited liability company (LLC) is the most often used legal structure for companies in Aotearoa New Zealand. Less common forms are unlimited and co-operative companies. It has the advantage of limiting the liability of shareholders, with the exception of any money they owe on their shares or they personal guarantees they have made to lenders or creditors through the activities of the company.
LLCs are incorporated entities and are therefore regulated by the NZ Companies Office under the Companies Act 1993. Corporate regulation in New Zealand is based on the law that governs the rights and conduct of companies, their investors, directors, employees, shareholders, and other stakeholders interact with each other.
What is a Company?
When a company registers and become incorporated, it gets a separate legal identity and in the eyes of the law, is a body corporate (corporation). As a legal structure, a company may be a good option if you want to keep control and decision making in the hands of a small group of people. The structure offers your group members limited liability, meaning that investors and owners’ private assets are not at risk if the organisation fails, a debt is unpaid, or contracts are unfulfilled. With a limited liability company, it becomes much easier to transfer ownership of properties and revenue.
In Aotearoa New Zealand, the best indication that an organisation is an LLC is its legal name, which ends with words like Limited, Ltd, or Tapui, the Māori word for limited. Companies always have at least one director who runs the organisation and at least one shareholder who owns a share of the holdings. A shareholder is a person who invests money into the corporation in exchange for ownership.
According to corporate regulation in New Zealand, all companies are considered LLCs unless their constitution says they aren’t. A constitution is an important source of information about the rules of a business. It defines how decisions are made and what responsibilities members of the organisation can take on. Constitutions must align with the Companies Act 1993 and be adopted formally by the company directors during a Board meeting. Any changes to the constitution must be approved by 75% of the company’s shareholders.
Company Directors: Powers, Duties, and Liabilities
A limited liability company is run by a Board of directors whose members are responsible for making decisions on behalf of the organisation, its shareholders and owners. As a Board, directors must meet regularly to discuss the company’s activities, performance and progress. They have a duty to tackle the difficult issues and lead the group’s vision for the future. The company structure is in some ways less democratic than a trust or society, Board directors are appointed rather than elected by members. They oversee legal, business, and financial issues and work to ensure compliance with New Zealand laws.
Board members are also expected to maintain accurate records of important decisions they make and up-to-date registers, including the constitution, meeting minutes, resolutions made by shareholders and directors, annual reports and returns, and annual financial statements to file with the Companies Office. The company must call an annual meeting with its shareholders and has a duty to act in good faith and in the company’s best interest, exercise powers for the intended purpose of the organisation, and make decisions with care, diligence, and skill.
Board of directors can appoint a chair to facilitate meetings and develop formal procedures for conducting meetings. A limited liability company Board structure tends to be more formal than other non-profits and are accountable to shareholders when they make decisions. This means shareholders can vote to have directors removed from the Board or can apply to a court to do so. If a director acts in bad faith or engages in criminal conduct, they may face up to 5 years in jail or a fine of up to $200,000.
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The Companies Act 1993
“The Companies Act 1993 is the core legislation within the system, as companies are the predominant form of entity. The regulatory system governs the ‘lifecycle’ of entities, including: how they are created (for example, through incorporation), entity governance and administration, including the powers and duties of directors or officers [and] the rights and obligations of shareholders or members, business rehabilitation options, including amalgamations, compromises and voluntary administrations, and liquidations, including rules for how any assets are to be distributed.”1.
The Ministry of Business, Innovation and Employment – Hikina Whakatutuki is responsible for corporate regulation in Aotearoa New Zealand and administers the Companies Act 1993. The Act describes the rules directors, officers, shareholders, and members must follow to remain in compliance and continue to operate as a limited liability company. The Ministry also defines other company obligations and processes such as:
Registering as an incorporated entity
Meeting reporting requirements
Following insolvency or restructuring procedures
Investigations in the case of a breach of law
Removal from the register if the company no longer meets requirements or ceases operations
These obligations and processes are meant to protect the people involved with the company’s work, including owners, employees and the public.
Benefits and Limitations
As an incorporated limited liability company, owners have some key advantages. A company is easy to set up, which is useful when you want to undertake commercial activities. Like other incorporated entities, the company’s status as a separate legal entity gives it the power to enter into legal agreements as an organisation. Shareholders have limited liability protection if the organisation is unable to pay its debts. A corporation has the same rights and obligations as an individual, including making purchases, signing leases, borrowing money, and holding assets or property. Owners of the company also become eligible for financial incentives such as lower tax rates and dividends when the organisation makes money.
Alternatively, forming and maintaining a limited liability company may be expensive. The process of running the organisation may involve hiring specialists like accountants and lawyers. There are costs associated with filing annual financial statements, getting regular audits, bookkeeping, and investing in training for Board members, management, and other staff. As corporations, companies have more legal obligations to meet and there is more work involved with their corporate governance. This can be time consuming, burdensome, and demanding. Companies are more complex than charitable community-based organisations. Reporting requirements are more significant than with other structures.
Directors could still be liable if they fail to meet their obligations or breach New Zealand laws. Your Board directors should be knowledgeable in key areas such as finance, law, and governance as they will need to understand complex rules and regulations and make sure the organisation follows the Companies Act 1993 rules. If a director breaches the law, whether intentionally or unintentionally, there could be serious consequences for the company, and they could even be convicted of a criminal offense.
Can companies pay dividends to shareholders? How do I make money as an owner?
According to the Companies Act 1993, limited liability companies can pay dividends to their shareholders in proportion to the shares they hold. A company share is a unit of equity ownership based on the original amount of money invested by the shareholder. Both the Board of directors and shareholder group can approve these payments but, the company must be able to meet the solvency test and pay its taxes before payments are made. To satisfy the solvency test, a company must be in a position to pay its debts and its assets need to be more valuable than its liabilities.
What is the process of closing down a company?
If your company is no longer operating or becomes insolvent, you will need to initiate a winding up process. Before closing the company, liquidation of your assets must take place. This can be initiated by the shareholders voluntarily or be Court ordered by an unpaid creditor. The first step is for your Board to pass a resolution that confirms the insolvency of the company. The resolution must be signed by the shareholders and filed with the Companies Office. When winding up a company, owners are obligated to file a final tax return, secure and store their business records, cancel their GST number with Inland Revenue – Te Tari Taake, and submit a letter to the Companies Office to confirm they agree to having the company name removed from the Companies Register.
Receivership vs administration: What if a company can’t pay its debts?
When a company is unable to pay its creditors, it may be placed into liquidation to sell assets and repay the debt. The most common option is to go into receivership, but in some cases, organisation and creditors can accept voluntary administration. Receivership is when a company decides to put their assets into liquidation due to financial difficulty. In this case, the court can appoint a receiver to take control of company assets and pay the creditor. Voluntary administration is less common in New Zealand and is the process of appointing an external administrator to benefit all the company’s creditors. Receivers are appointed by a secured creditor, either under the terms of the company’s constitution or by a court.
What are unlimited companies?
When a company incorporates, the default legal structure is the limited liability company (LLC). An unlimited company is an entity that is unable to offer shareholders unlimited liability protection. Instead, owners are legally required to pay any debts incurred by the organisation if it is unable to meet its financial obligations. To form an unlimited company, owners must include the liability provision in the constitution. This legal structure is sometimes used by foreign companies that need to meet the legal requirements of their home country.
What is the difference between a cooperative company and a limited liability company?
Co-op companies provide their members with goods or services, while LLC is the umbrella term used to describe companies with limited liability. A co-operative company is a specific type of limited liability company with the purpose of serving the common benefits of its members. In this case, the company is run in a similar way to a co-operative society, but because the organisation’s members are also the shareholders, they own and control the business.
This fact sheet is intended as a simple overview. Non-profit law is incredibly complex and there are many components, allowances, restrictions, exceptions and important qualifications that are not described above. Dedicated legal advice should be sought from a legal practitioner before taking action.
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