Starting a small business – Frequently asked questions

The Small Business Company

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Q: Should I use an accountant or lawyer?

A: You can trade and put in your own tax returns, or you can use a bookkeeper (someone skilled at keeping books who is not a fully qualified chartered accountant). I recommend, though, that you find an accountant. Very few successful small businesses function without one. You're unlikely to be aware of all aspects of the tax system. Ask friends already in business for recommendations, and choose an accountant who works with other small businesses. Your accountant should be able to save you money and stress by advising what you can claim and how, as well as giving you advice on how to set up a basic bookkeeping system.

It's also a very good idea to consult a lawyer about your business intentions. Certainly do so if you intend signing a lease or any legal document. Depending on your business, a lawyer might advise you to take out public liability insurance or other forms of protection.

Q: Should I approach Inland Revenue?

A: Yes, don't be afraid to contact Inland Revenue. Too many small business people view Inland Revenue as a bogeyman best left as undisturbed as possible. "Send them money regularly and hope they leave me alone!" seems to be a common attitude. In fact part of Inland Revenue's job is to offer help and information, particularly for new businesses. You'll find their web site www.ird.govt.nz very useful for answering your basic questions about setting up a business and by phoning 0800 377 774 you can also arrange to speak to a Business Tax Information Officer. The web site lists various helpful publications you can order, pick up from your local Inland Revenue office, or download from the site itself. There's also a good FAQ (Frequently Asked Questions) section. Your tax dollars fund this service, so why not make full use of it? You can ask for free advice even if you're just thinking about starting a business.

Q: Can you briefly explain the pros and cons of the different business structures?

A: At the risk of oversimplifying, here's a broad outline of the differences.

As a sole trader you are the business and the business is you. Most people start this way because it offers low-cost, easy entry, but the disadvantage is that you are totally responsible for the debts and liabilities of your business. You'll be taxed on your income from the business at individual tax rates.

Partnerships are usually formed when two or more people, perhaps with different or complementary skills and resources, get together to run a business or to share office space and overheads (the partnership structure is popular with accountants and other professionals). As a partner, you are liable both separately and jointly with the other partner(s) for the liabilities of the partnership. You split the profits according to the partnership agreement (for example, two partners agree to split the profit 50%). You are taxed at individual tax rates on your income from the partnership. The disadvantage is your liability not only for your own debts, but also for those partnership debts incurred by your partner(s).

When you form a company, you create a legal entity quite separate from yourself. The company can continue long after you have departed, because your shareholding in the company can pass to someone else. The 'Limited' part of a company's name stands for 'Limited Liability'. This means that as a shareholder in the company you are not personally liable for the company's debts (beyond the paid-up capital) unless it can be shown that you have acted recklessly (for example, continuing to trade when the company is insolvent). You'll be taxed at a different rate from the company.

Companies carry more credibility in the marketplace than sole traders, because taking the trouble to form a company shows that you are thinking about the long-term future of the business. The disadvantages are that a company costs more to run because more compliance paperwork and registration costs are involved. Also, in practice the 'limited liability' advantage is offset by the fact that a bank or other lender will typically require your personal guarantee before advancing finance of any significance.

Q: How do I register a company and can I do it myself?

A: Your accountant or lawyer will be able to set one up for you and advise you on a suitable structure and constitution. There are some wrinkles that you need to be aware of so at least discussing your intention with an accountant or lawyer is a good idea.

If you're a confirmed 'do-it-yourself' type, then visit www.companies.govt.nz and browse the options. A private business called Standard Businesses offers a complete business registration service at a reasonable cost. Visit their website www.companies.govt.nz for more details.

Q: Should I write a Business Plan for my business?

A: I certainly recommend you complete a Business Plan. Three good reasons: firstly, the research and thought you'll have to put into writing the business plan will help you to sharpen and/or adjust your ideas.

Secondly, any lending institution that you might approach for funds, such as a bank, will want evidence that you're done your homework and properly thought through your business concept.

Thirdly, the business plan provides a road map for your business. It lays out what you intend doing, how you intend to do it, the resources you need, and your action deadlines for each stage. The business plan forms a 'living document' that you can then revisit at regular intervals and modify according to your progress or changing circumstances.

New Zealand Trade & Enterprise offers an excellent Business Plan (order the Plan from them or download from their web site www.nzte.govt.nz - in the biz section there are links to various publications.

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