Starting a small business – Frequently asked questions

The Small Business Company

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What business structure should I choose? Do I need to register a company? Should I use an accountant? If you’re looking at starting a new business it can seem like there’s a lot to think about. These FAQs provide answers to some commonly asked questions about starting a small business.

People often ring us to ask about how to go about starting a small business. Here are some of the questions that seem to come up most frequently, together with our responses:

Q: I'm thinking about turning my hobby into a business. Do I have to form a company so I can test out my concept?

A: No, you don't have to form a company to start testing your concept. There are three basic business structures in New Zealand: sole trader, partnership and company. Most businesses start as sole traders, then progress to partnership or company status later.

You can 'test the waters' as a sole trader (the simplest way to start), choosing whatever trading name you like, provided it does not conflict with an existing business name or brand, or is confusingly close to an existing name or brand. For example, you might decide to trade as 'Susan Brown Craft Products'. Provided no one else is using this name, or something very similar, you should be able to order your signage and stationery.

Q: How do I check if someone else is using my preferred trading name?

This is a bit trickier, because there is no central register that we're aware of in New Zealand of 'sole trader' trading names. For companies it's different. You can find out if someone else is already using your proposed company name by visiting www.companies.govt.nz and completing a name search.

We suggest you search this site first anyway to see if a company is using your proposed trading name. Then search the Yellow� site www.yellow.co.nz to make sure there's no similar or identical listing in either the White Pages or the Yellow Pages. Double check by searching at least your local phone book. As a final check, search for similar names through www.google.co.nz or other local search engines. If all these avenues show no one is using your preferred trading name, you should be in the clear to go ahead. If by some unfortunate chance someone else is using the same name, you can at least show that you've made a serious attempt to find a match.

Q: Must I register somewhere before I start?

A: If you form a company, then various formal steps are required. But even if you start as a sole trader, you should notify Inland Revenue so that they can record you are self-employed. There are three good reasons for this:

Firstly, to register for accident cover. Inland Revenue will in turn notify ACC to provide you with the appropriate cover. Otherwise, if you have an accident, you may not have your claim accepted from the date you say you went into business unless the date has been recorded somewhere (with Inland Revenue in this case). This applies both to the start of a full-time enterprise and to the start of a part-time business (such as in the evenings) while you're still employed.

Secondly, so that Inland Revenue can correctly code the computer to send you the appropriate Business Tax forms at the end of the financial year. These forms will help to remind you of your obligations.

Thirdly, to help you with your claims for business expenses. The reason for this is that Inland Revenue is unlikely to let you claim for equipment you bought some time ago when you were operating as a hobby. So if you want to claim legitimate business expenses, such as extra equipment you might need to buy, stationery, signage, etc., start keeping proper records immediately and let Inland Revenue know you're 'in business'. You can then give your records to your bookkeeper or accountant at the end of your first financial year. Note: the most common ending for a financial year is the 31 March. Even if you haven't been trading for a full 12 months before the 31 March, you should still give your records to a bookkeeper or accountant for them to prepare a return for Inland Revenue.

Here's a tip: the best way to let Inland Revenue know of your intentions is by phone. But remember that Inland Revenue phone lines are open until 8 pm each weeknight, and to 1 pm on a Saturday. So ring after normal business hours: it's quicker.

Q: If I'm starting as a sole trader, should I open a separate bank account?

A: Yes, this will make life much easier for you and for your accountant, because this step allows you to separate clearly your business income and expenses from your private income and expenses. Visit your bank and ask for a separate account. Before the bank can open a separate business bank account they will need a business Inland Revenue number.

As a sole trader your business Inland Revenue number will usually be the same as your existing personal one (but check this out with Inland Revenue beforehand).

This separate business account will typically be named something like 'Susan Brown trading as Susan Brown Craft Products' (or whatever). The bank statements are usually the prime source of information for your accountant or bookkeeper when they come to put together your accounts at the end of your first year's trading.

Make life even easier for yourself by getting a cash card from the bank in your trading name. This way, instead of running a separate petty cash account, you can use the cash card to pay for minor purchases (like stationery) through EFTPOS. All these transactions will be neatly listed on your business bank statements and you can just staple the relevant EFTPOS till receipts and invoices to the bank statement every month. No need to carry cash around or worry about balancing a petty cash account.

A similar tactic is to use a business credit card. Make sure, though, that you receive and keep proper GST invoices for all your purchases.

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