Finding best structure critical to lasting success

By GLENN SMITH

If you want to start your own business, all you have to do is have a good product or service and you're away. Right?

Well ... no, actually.

Businesses must operate according to New Zealand law. No matter how wonderful your product or service is or how good your intentions, if you don't have a sound, lawful business structure, you set yourself up for legal and financial woes and miss out on many advantages.

As a business owner, you should also plan on paying the least possible tax, and ensure your private possessions are not at risk.

It's not always easy to know how to operate your business legally. Company law is a complex area.

Take just one piece of legislation, the Companies Act 1993, which governs the operation of trading organisations in New Zealand. This act contains 397 clauses in 257 pages and, in order to operate your business lawfully, you must fully and consistently comply with every rule in this act and other key legislation.

There are several recognised ways to operate a business, but if you choose the wrong one you could find yourself in financial trouble.

Let's take a quick look at the different options available.

Sole trader

This is the simplest and cheapest legal structure. Sole traders can operate alone, or with employees, so long as they comply with all legislation, including the various Inland Revenue Acts and the Fair Trading Act.

The IRD likes sole traders, who are vulnerable in many ways.

For instance, if you are a sole trader and you get into financial difficulties, your personal possessions can be seized to pay business debts. You can have bankruptcy forced on you.

As a sole trader, you pay 39c in the dollar tax on earnings beyond $60,000 (rather than the 33c company tax rate).

Sole traders have no protection for their name. Anybody can register a company using your trading name.

Partnerships

A partnership is not really a legal entity and suffers all the same disadvantages of a sole trader and worse.

If the IRD likes sole traders, it must love partnerships.

If things go horribly wrong in a business partnership (and they do), each partner may be liable for their own debts and those of their partner.

Some of the perils can be avoided with a detailed partnership agreement, but such a document requires careful drafting by a skilled solicitor and comes with a high cost.

Limited liability companies

An incorporated limited liability company is the safest, most convenient and secure business structure.

Once a name is approved by the Registrar of Companies, no other company can be registered with the same or near-same name.

So long as you don't act criminally or negligently, you will be able to keep your personal assets separate from your business activities, because a limited liability company is viewed in legal terms as a separate entity.

Banks are often more willing to lend to a company (provided there is sufficient security) since it is a business structure they are comfortable with. A company is a recognised, accepted and trusted business vehicle. You enter the market place with a fundamental level of credibility.

If you wish to pay wages to a relative who works for your company, there is no need to get approval from the IRD, as is the case with a sole trader or a partnership.

When it comes time to sell your company, you will have the structure and records available for a new owner to make a speedy and informed decision to buy.

You will enjoy the benefits of lower tax rates for earnings over $60,000.

* Glenn Smith runs a company formation business and is the HomebizBuzz company formations expert. HomebizBuzz offers a free company name check service.