Running your own business is rewarding and challenging at the same time. If you’ve prepared your business plan and are ready to start the process of turning your plan into reality, this article gives you a checklist of 10 key considerations to help you on your way.
1. Type of organisation
Most businesses are either sole traders, partnerships or companies.
A sole trader is an individual who conducts the business.
The sole trader:
- can employ workers to help with the business;
- pays tax on income under the graduated tax rates for individuals; and
- is solely responsible if the business gets into financial or legal difficulties.
A partnership is usually two or more individuals in business together (although companies and trusts are sometimes partners as well).
The key characteristics of a partnership are:
- the law doesn’t treat partnerships as separate legal entities (except for GST);
- each of the partners declares their share of the partnership’s profit on their own income tax returns; and
- all the partners are responsible if the business gets into financial or legal difficulties.
A company is legally separate from its owner(s) (i.e. its shareholders(s)). The law treats companies as if they are separate persons (known as “legal persons”) for many purposes.
The shareholders own the company. The directors run the company but they must get the shareholders’ approval for significant decisions. The shareholders and directors can be the same people, different people or a mixture.
Unlike sole traders and individual partners whose income is taxed at graduated rates, companies are taxed at a flat rate (currently 28%) and therefore companies need their own IRD numbers. Because income can’t be taxed twice, when a company pays dividends to the shareholders, the dividends come with tax credits (called “imputation credits”) for the tax that has already been paid on the company’s taxable income.
Companies also offer limited liability to shareholders. A company is responsible for its financial and legal obligations. Shareholders are only liable to lose the amount they’ve paid for their shares or, if they haven’t fully paid for their shares, any money owing to the company for their shares.
Directors, however, have legal duties to the company, shareholders and, to some extent, the company’s creditors.
If you need working capital then you may have a number of options. Generally, the options are to:
- sell shares in your business, or
- use a mixture of loans and the sale of shares.
This can be a key factor in deciding which type of organisation you choose because only companies can sell shares in their businesses: sole traders and partnerships can’t.
Having a New Zealand Business Number (NZBN):
- shows suppliers and customers that your business is genuine;
- frees up the time that can be wasted filling in repetitive online government forms by connecting to your NZBN beforehand; and
- makes other dealings with government faster and easier.
If you set up a company, the Companies Office will automatically issue your company with an NZBN. Sole traders and partnerships can also register for an NZBN.
Income tax for sole traders, partnerships or companies is summarised in section 1 above (Types of organisation).
In addition, all businesses must register and pay an ACC levy: even if you’re a sole trader working from home.
Further, all businesses must register for GST if their income is more than $60,000 each year. Registering for GST is optional if the business earns less than $60,000 per year. In short, your business must collect the GST on the price of goods or services it supplies and pay it to Inland Revenue: but you can deduct the GST the business had to pay on most business expenses.
If you’re not working from home or otherwise won’t own the business premises, you’ll need a commercial lease.
There are a number of key terms you need to think about. For example, you can lease premises on the basis that they’re empty and that you’ll build the interior and furnish it. As a result, the rent will be more economical but there are obvious up-front costs. Alternatively, the landlord can build the interior, but the rent will be higher. Either way, tenants must usually reinstate the premises to a clean empty space at the end of the lease.
After the key terms of a proposed lease are agreed, the leasing agent usually produces an 8-page agreement to lease. These agreements are deceptively simple because, in the fine print, there’s an agreement to enter into a formal deed of lease comprising many terms and obligations not previously recorded in the simple 8-page agreement. Like all important contacts, it’s advisable to obtain legal advice before you commit to a commercial lease.
If you need to hire employees then your recruitment and selection process will be critical to the success of your business.
You’ll also need to comply with laws governing employment agreements, remuneration, health and safety and leave (annual leave, parental leave, sick leave and bereavement leave).
When it comes to employment agreements, one size does not fit all. Beware of online DIY agreements and trade association templates. Employment agreements should be fit for purpose and suitable if things go wrong. And they should also be signed before employees start work.
Employees can be your most valuable assets and getting employment agreements right is equally important.
Insurance provides you with some protection against a number of risks when you’re in business.
The subjects that business insurance cover can include:
- Real estate;
- Vehicles and machinery;
- Professional liability (when professionals make mistakes that cause financial loss);
- Public liability (if your business causes damage to property or other financial loss to others);
- Business continuation (when you can’t conduct the business due to events beyond your control);
- Key people (if a key person is unable to work due to illness or injury or death); and
- Shareholders (enables remaining shareholders to purchase the shares of a shareholder who makes an unplanned exit from the business due to illness or injury or death).
There are general laws and industry-specific laws that businesses must comply with.
All business must also comply with the Commerce Act which prohibits anti-competitive trade practices such as price-fixing (where competitors agree not to sell goods or services below a specified price) and resale price maintenance (when a supplier enforces a minimum price at which the reseller must on-sell goods).
If you’re providing goods and services to consumers, you’ll need to comply with consumer protection laws such as the Consumer Guarantees Act and the Fair Trading Act including product safety standards.
Further, if you have a customer database which stores information about individuals or you store information about individuals for other reasons, you’ll need to comply with the Privacy Act including letting those individuals know that you’re storing the information and why.
There are also many industry-specific regulations for the sale of motor vehicles, sale of liquor, sale of food, restaurants and cafes and so on. It’s essential to find out which regulations apply to your business.
Most people use the internet to search for businesses: including small local businesses. So if you don’t have a website, you won’t be found by any of those potential new customers.
You’ll need to register a URL with a domain registry and engage a provider to host your site and protect it from malicious software. It pays to shop around.
Most importantly, a well-designed website with a fast loading time will ensure that potential customers have a positive first impression.
You may also want to have a logo designed for your business as well.
If your business name or logo is sufficiently distinctive, you can register it as a trademark. A trademark lasts for 10 years and can be renewed.
The benefits include:
- the exclusive right to use the trademark in NZ; and
- legal protection to deter others from trying to copy your business name or logo.
However, to register a trademark you’ll need experienced legal help.
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