Running a small business: Duck dreaded red tape at your peril

In part seven of their 10-part series on how to start a business, WADE GLASS and GARETH HOOLE look at legal compliance and human resources

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While the previous articles may have left you feeling a little daunted, the challenges of employees will require further resolve.

But remember, nothing ventured, nothing gained.

It might be argued that a price businesses pay for operating in a well-ordered society is the complex legal system with which we contend.

Small-business owners often complain about the complicated compliance regime and its associated costs, but the alternative is likely to be more costly through litigation and confusion caused by playing a game without rules.

The entrepreneur in New Zealand does have several laws and bureaucratic formalities to navigate in their daily routine.

Not least are the Inland Revenue Department requirements which, if not observed, can land the entrepreneur in a great deal of hot water. The Income Tax Act, the PAYE and FBT rules and the Goods and Services Tax Act affect every business.

In addition, legislation such as the Companies Act, the Financial Reporting Act, ACC legislation, the Consumer Guarantees Act, the Property Law Act, the Credit Contracts Act, the Privacy Act, the Resource Management Act, the Personal Property Securities Act and various other pieces of legislation will affect your business.

You might also have to contend with the Treaty of Waitangi. You will be well advised while preparing your business plan to consider the legislation which could have an effect on your venture.

Take Peter, for example, who wants to open a petrol station in a suburban area.

To do this, he must build the store, courtyard and petrol tanks. He must hire staff to man the store and courtyard. And, of course, he must decide the most appropriate type of legal entity to operate the business.

Sounds simple? From only three sentences we know Peter will need to apply for a resource consent under the Resource Management Act, provide his employees with an employment agreement under the Employment Relations Act, and probably set up a limited liability company under the Companies Act.

Peter and the company are liable for income tax under the Income Tax Act and probably GST under the Goods and Services Tax Act. These are only the most obvious pieces of legislation to consider.

We cannot overstress the importance of meeting the IRD's compliance requirements.

The department imposes punitive penalties for non-compliance and if left unresolved, those penalties can accumulate into debts which exceed the underlying tax obligation.

Generally the IRD is tolerant of genuine cases of hardship and will allow payment terms, which naturally incur an interest cost, but which allow the errant taxpayer to bring his or her affairs into order over time.

But there is a limit to the department's forbearance and companies which fail to meet their taxation obligations are frequently placed into liquidation.

Even when it seems there is no need to file a return because there has been no trading activity for that particular period, failure to do so can result in a default assessment being issued.

That is an assessment based on the IRD's estimate of the relevant tax. If left unresolved, penalties and interest can accumulate and insolvency proceedings may even result.

Mark your calendar each month to remind you in advance of filing requirements as they fall due.

As each return arrives in the mail, deal with it in the proper manner, however much of a distraction it seems to be. When in doubt, seek advice from an appropriate professional or from the agency concerned.

Never be tempted to commit the document to the waste paper basket without checking the consequences first.

There is a cost of compliance associated with any business but the cost of non-compliance is likely to be far greater.

As your business grows and the requirements become more onerous it could pay you to engage someone to perform them on your behalf.

The latest piece of legislation which will have a far-reaching effect on any business which gives or receives credit is the Personal Property Securities Act (PPSA).

This act is based on North American legislation and changes the rules regarding security over the provision of credit.

The principles underlying the PPSA are too complicated to detail here and you will be strongly advised to seek help if your business contemplates the giving or taking of credit.

More information can be found on the website www.ppsr.govt.nz or from your accountant or solicitor.

The PPSA embodies modern technology and is a web-based mechanism, which means that you will need access to the internet to register security interests or to check the credit background of a potential customer.

It is very important that your business deals with its customers against a backdrop of well-defined terms of trade, particularly regarding retention of title of goods.

This is a particularly important aspect of the PPSA and advice should be sought at the outset.

Any business which involves the use of the environment in any way is likely to be affected by the Resource Management Act and will probably be faced with other central Government and local authority licensing requirements too.

Again, conduct appropriate research in advance to determine exactly what formalities you face, no matter how obscure they might appear to be. In this context it would be wise to assess whether any Treaty of Waitangi issues are involved.

As your business grows it is logical that you will need to employ staff.

The rules in this area are complex and the costs of getting things wrong can be substantial.

If your business employs staff then you must be mindful of the Employment Relations Act (ERA).

This statute has far-reaching implications for employers, which if not addressed before the employment relationship begins can have potentially devastating consequences.

The ERA covers employee rights, employment agreements, resolution of workplace problems and mechanisms for forming and ending employment relationships. Suffice to say, seeking the advice of a qualified human resources consultant is essential before employing your staff.

A word that most business people prefer to avoid when dealing with taxation and other compliance formalities is "surprise".

Check all the potential legal pitfalls before you begin your business venture and design proper systems to ensure that you do not overlook any of the regulatory requirements to avoid a great deal of aggravation and significant costs.

Also, a successful business person spends more time working "on" their business, rather than "in" it.

Do not let the paperwork accumulate and detract from what you could otherwise be doing, namely making money. Organise yourself, or seek assistance, to ensure that regulatory compliance requirements do not get on top of you.

* Next we discuss basic record-keeping, which in itself is a form of legal compliance as well as sound business practice.

* Wade Glass (assistant manager) and Gareth Hoole (associate director) are chartered accountants in the Corporate Recovery Services unit of Staples Rodway, Auckland. The views expressed are their own and not necessarily those of Staples Rodway.