KEY POINTS:
Do you enjoy sleeping in? Love having regular holidays? Prefer a no-stress lifestyle? Then setting up a small business isn't for you.
However, if you enjoy a challenge, are prepared to donate your blood, sweat and tears, then the rewards to creating your own commercial enterprise can be
huge.
About 97 per cent of New Zealand businesses are SMEs, that is, they employ fewer than 20 people, and 87 per cent employ 5 or fewer people.
There is debate over whether such a high SME count means New Zealand suffers from the "three Bs" syndrome: instead of building their businesses into $100 million giants, SME owners are happy to simply make enough money to buy a boat, a bach and a BMW.
So, do we lack ambition? It's probably more that Kiwis value their leisure time, and lifestyle choices dictate whether or not Kiwis want to try to be the next Graeme Hart.
It's also tough out there: more than half of all new businesses fail in their first year and 80-90 per cent fail within their first five years. Add to that the small domestic market and the difficulties of carving out a market offshore and it's easy to see why many businesses are content to stay small.
But the good news is that New Zealand does have its share of business success stories: The Warehouse, Icebreaker, 42 Below, Kathmandu. And they all started out small.
1. Setting up a small business
Get help. Trying to do everything yourself is a recipe for stress and burnout. Accountants or tax agents, bank managers, local councils, lawyers, and small business enterprise centres are valuable sources of information.
The Inland Revenue Department offers a free business advice service for tax questions.
Mentors are another option. A mentor is a role model who you can consult for advice, guidance and support. Business in the Community provides successful business people to mentor small business people, free of charge. Informal mentoring relationships can also be extremely beneficial. Join industry associations, make contacts, identify businesses you admire and contact them.
2. Company structure
A limited liability company, a partnership or a sole trader? There are many ways to structure your business. The option you go for depends on your situation and your business, and the equipment, resources and money you'll need to get things up and running.
A limited liability company offers more protection to shareholders.
Once a company is formed, it is regarded as a separate legal entity from its shareholders. The company is liable in full for all obligations that it incurs, and the concept of limited liability becomes important if the company can't pay its debts and a liquidator is appointed.
A sole trader operates a business alone. The trader controls, manages and owns the business and is entitled to all profits but is also personally liable for all business taxes and debts.
Sole traders can generally set up a business without following any formal or legal processes and can employ other people to help run the business.
In a partnership, two or more people run a business together. Sharing responsibility and any profits or loss equally, unless the partnership agreement states otherwise. Each is liable for any debt within the partnership. While it can be an effective way to share business operation costs, partners may be liable for debts incurred by other partners, and there is always the chance of personal
conflicts.
3. Finances
Start-up businesses eat money, and seemingly can never get enough. The most common investors in start-up businesses are family and friends. You could approach a venture capitalist but be aware they will most likely want some control to protect their interests.
If you're applying for a bank loan, your first step is to prepare your business plan.
Your banker is less likely to believe you than a professional third party so have your business plan and financial projections verified by a business consultant or chartered accountant.
* This article is from the 3-part supplement 'Money and You', available free with printed copies of the Herald this week.
