Five things to think about when starting a business

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New Zealanders are very entrepreneurial, and small to medium businesses dominate our business landscape.  Almost all of us will consider starting a business at some point in our lives, but how do you ensure your business is one of the successful ones?  Careful consideration, and good advice at the outset could be the difference between success and failure.

1. What is the best structure for your business?
A limited liability company is the most common form of business structure.  Other options include a sole trader, partnership, trading trust, and a limited liability partnership.  Which structure is best for you depends on the type of your business.  Ask yourself:

–        How risky is the business?

–        What liability will you have to clients and/or members of the public?

–        What are your likely tax and GST obligations?

–        What security is your Bank going to require to lend you money?

–        What are the growth plans for the business?

–        How do I best limit the above liabilities?

2. Governance
Businesses are best managed through a set of clear governance rules making it clear to all of the parties involved what decisions can be made by who, when and how decisions can be made, what the processes are if there are disputes, how a person can get out of the business, and so on.  Good governance is not just for bigger companies, but is also important in small-medium structures and family run entities.  Examples include:

–        A company constitution

–        A shareholders agreement

–        A partnership agreement

–        Customised Trust Deed, and/or a trustee company as trustee (which would have a constitution) 

3. Asset protection
What protection have you got in place if the business does not work out?  How can you protect your house for your family? Do you have a family trust? Is your current trust adequate? What will happen to your business when you die or if you become mentally ill or separate from your partner? It is best to review your estate plan prior to or at the same time as setting up your business. 

4. Costs
There will be costs involved in setting up your business and maintaining the business, but also ongoing costs involved in maintaining good business practice and compliance.  Have you taken these into account?  Do you know what the Bank requirements are to lend you money?  Do you fully understand the risks involved with the security you may give? Have you sat down with an accountant and discussed the cost benefit ratio and projected profit of the business? 

5. Other legal considerations
Depending on the type of your business and its size, you may require further legal contracts.  Some of the examples listed below are required by law and some are essential to ensure your business is protected and runs smoothly, such as:

–        A lease;

–        Employment contracts;

–        Terms of trade;

–        Supply and distribution contracts;

–        Intellectual property protection;

–        Licences.

If you are considering starting a business, sound commercial legal advice early on can help you avoid potential issues later on, protect your investment and help your business get off on the right footing.

For advice on starting a business, contact starting a business expert Peter Smith by phone on 09 837 6884 or email peter.smith@smithpartners.co.nz