What do I need to know if I am looking to go into business?

What do I need to know if I am looking to go into business?


Author: Michael Levertoff

Kicking off a business brings with it a myriad of questions you'll need answered about your business, the Inland Revenue department and your tax obligations. This article will provide answers to many of the questions we get asked on a regular basis.



About Inland Revenue

Inland Revenue have changed for the better over the last few years - you can get access to your personal information faster, tax processing is becoming easier, and their staff are competently trained to manage most questions uniformly. And in another five years expect the process to be just like "internet banking".

Having an online account with Inland Revenue will help you keep an eye on your tax affairs with ease. You can go online now to create your online account with Inland Revenue. Click for more.



Naming your business

You can decide what to call yourself - this is called your "trading name", and can be different from the name of your company, partnership or trading trust.



What structure is right for you?

If you are a one-man-band, a property investor or a mum-and-dad business, and you will be turning over less than $500,000 per annum, consider the following options before deciding on the structure that is right for you.

Sole Trader. If you are just starting out on your own, sole trading is the simple way to kick off your business. Remembering you can always change things later if you need to.

As a sole trader, you'll be trading under your personal IRD number, and it's OK to use the money you collect any way you wish. You don't need to pay yourself a taxable salary - you can take "drawings" as and when needed.

NZAG recommend you retain 20% of your gross turnover to cover tax and GST. At the end of the year NZAG will work out your taxable income.

Calculating wages will mean PAYE, which you hold on behalf of the taxpayer and pass onto the Crown each month. Make sure you set aside PAYE as you could be prosecuted if you spend it.

Just be aware that because you are trading as an individual, you're responsible for all the bills and any damage you do to a client's property. Consider getting some advice on public indemnity (or public liability) insurance, and watch your outgoings so that you can always pay your bills when they fall due - as your credtiors can seize your personal assets if you can't pay.

Partnerships. A partnership between two business partners or a couple is simple but both partners are jointly and severally liable for the debts incurred; it doesn't matter which partner incurs the debt - both partners are 100% liable. And if one partner wants to exit the partnership it cannot be transferred, it must be wound up.

On the flip side, partnerships can be useful particularly for mum-and-dad business owners because income or losses can be split equally between the partners. This is useful for tax efficiency and for maximising working for families tax credits for many property investors.

As with sole trading, both partners can take drawings as and when needed and NZAG recommend you retain 20% of your gross turnover to cover tax and GST for the end of the year when NZAG will work out your taxable income.

Companies. Companies are popular business entities - it is simple to set up a company, and move ownership around. Company debts are limited to the value of the assets of the business, which means shareholders are not personally responsible for debts incurred. But directors can be held to account, and must ensure the company is trading in accordance with the Companies Act, or face convictions including imprisonment for up to seven years for certain breeches of the Act. The most important principal is that a company must be able to pay its debts as they fall due, and if they are not able to do so, should immediately seek professional advice from NZAG.

Inland Revenue business basics

Income. It is a legal requirement to issue an invoice for any income you intend to collect. In the invoice you must provide;
 The trading name of your business
 The date
 The client's name
 A description of the goods or services
 The amount billable.

 If you are GST registered you must issue invoices that comply with GST rules, which means you must also;
 Use the words "Tax Invoice"
 Provide your GST number on the tax invoice

Income should be banked and any cash not banked should be declared.

Expenses. Any expense you intend to claim must be accompanied by a valid invoice laid out properly, as above.

If you operate from home, a portion of your expenses can be claimed. Ensure you ask NZAG for a house plan form to calculate this correctly.

Vehicle expenses can be claimed either as a full claim of all expenses if you use a vehicle solely for business or as a km claim using a logbook. NZAG provide an online logbook. Click for more.

If you need further assistance please Ask a question.