Three days into the New Year and across the country the entrepreneurial juices are flowing. The start of the New Year is one of the most popular times for people to set up new business ventures. With the ease of doing business in New Zealand it takes only one day to set up a new business. This is a lot quicker than the global average of almost 20 days to get a new business set up. This can result in a lot of spur of the moment decisions. Sitting in the sun with a drink, ideas flowing and in full holiday mode may not be the best time to quit your day job to set up that new business. Therefore, here are a few things you should consider first:
Why Don’t You Like Your Day Job?
This is a pretty fundamentally important place to start. Do you love the work you do but hate something else? The easy alternative would be to find the same work at a different employer. If this isn’t possible then you could start looking at setting up a new business to compete with your current employer. However, you’ll need to be aware of any restraints of trade in your employment agreement before you head down this path.
Do you hate the work and want to do something completely different? This is potentially the most high risk situation. Turning in a steady pay cheque is not an overnight decision. The best option will be to set up your new business as a ‘side hustle’. This will allow you to indulge in work you love doing while still earning a living. Once your side business has developed to the point where it is capable of earning you a living, you can quit your day job and commit to it full time.
Just because you aren’t working on your business full time in the early days doesn’t mean that its growth will suffer. With proper planning and systems in place, your new business can grow while you work and you can develop it further in your spare time.
What Is Your New Business Idea?
Write it down. If you can’t concisely explain it, can you successfully execute it?
There are no shortage of self employed people who made the jump from comfortable employment with an ill-conceived idea. These businesses likely make up the lions share of those that fail within their first months and years of operation. Don’t be tempted to run into a new business until you have crawled through all the ideas in your head and plucked out the one you’re most passionate about making a success.
Self employment can be a rewarding journey if done right. Starting with a great idea that you are passionate about is essential. This passion and foundational detail will combine to make the rest of the planning painless. It will also help to reduce the stress many self employed people face in their execution. For many, the main aim of self employment is a better overall quality of life. Adding stress through trying to execute a poorly conceived idea doesn’t help achieve this.
Is Someone Else Already Doing It?
If there is established competition, you’re already fighting an uphill battle before you start. However, this is just a barrier to entry and can likely be overcome with proper planning.
Make Sure You Have A Competitive Advantage
Having a competitive advantage is the best way to set up a new business in a competitive or saturated industry. Its the thing that differentiates what you do or what you sell from the products and services of your competitors.
Making sure you have a competitive advantage can be a time consuming process. It requires you to not only have a solid understanding of exactly what you do and how you do it but also requires that understanding about all your key competitors. Therefore, market research is important. Look at all of the competition. Isolate those that are your most direct and closest competitors. Then dive deep into them. How do they work? Where do they source their products? Where do they get their customers?
There are hundreds of questions to ask yourself about them. Need a hand? Reach out to an MBP Business Advisor for a free chat to help you out.
Is Your New Business A Protected Idea?
If someone else is already doing it then chances are they have registered trademarks, patents or both to protect their idea and their competitive advantage. Trademarking your business name is the best way to tell others that it is your intellectual property (IP) and they can’t copy it. A patent is the best way to protect your idea if you have come up with a new way of doing something. Both trademarks and patents can take months to get sorted so starting early, and before your novel new business is in full swing, is essential.
You can do a quick check at ONECheck, a service of the Ministry of Business, Innovation and Employment. However, if you’re unfamiliar with IP law or the application process, it will be best to get in touch with a professional.
How Will You Structure Your New Business?
There are numerous ways that you can choose to run your new business. All of them have their pro’s and con’s and we cover these in greater detail in another article. Below is a simple run-through of the main options and some key considerations for each.
Sole Trader
A simple way to start up straight away is to simply trade as a Sole Trader. There is nothing you need to do if your turnover is below $60,000 and you can get started right away. There isn’t even any need to register your business (unless your local council requires your particular type of business to be registered with them for health compliance). This means everything is just done under your personal name and all the tax liabilities are under your personal IRD Number. If you are registering for GST or employing others and registering as an employer, it may be best to set up either a partnership or company so that there is a separate IRD Number for the business.
Partnership
Running your new business through a partnership can be a great option, especially if you are going into business with someone else or a group of people. All you need is to draw up a partnership agreement and then register the partnership as a non-individual tax payer with the IRD. This registration with the IRD simply gets the partnership a unique IRD Number. There few further benefits that the registration or Partnership structure offers the partners.
Having a solid Partnership Agreement is key. This is the foundation on how you and your business partners work together, make decisions and resolve disagreements. Your lawyer or MBP Business Advisor can help get you sorted with this.
Company
This is often the most popular option. It not only makes your business look more professional but also has a number of other benefits. A company can be incorporated in New Zealand in a single day, as long as the paperwork is submitted early enough. The incorporation registers your company with the Companies Office. It also registers with the IRD for an IRD Number and, if required, is registered for GST as well.
A limited liability company has many advantages for the shareholders. The most notable is that you are only risking your shareholder investment in the company. As long as the company is incorporated and operated correctly your personal assets are likely much safer than under a sole trader or partnership structure.
There are also clear tax advantages with the company tax rate at a flat 28% whereas the top marginal tax rate under a sole trader or partnership structure is 33%. These tax advantages are subject tot he Personal Services Income Attribution Rules. We will outline these rules in greater detail in another article but he basic gist is that if you personally do the majority of the work, you get allocated the majority of the profit.
Incorporating a Company simply registers it with the government. It does not protect your company name as a form of Intellectual Property. Likewise, it does not check that your Company name is not a violation of someone else’s IP. Therefore, it is important to run the IP checks before incorporation and file your own trademark registration as a part of the business set-up process.
Trading Trust
There is also the option of trading through a Trust. Trading Trusts are the most complex of the options covered here and unless you are an expert in them or have the budget to employ an expert trust and business accountant, then opt for another option. They are the most expensive option to establish and to administer annually as there is often both Company and Trust compliance required. Structuring your business to be owned by a Trust but not operated by it can be a good way for some people to maintain a separation of their personal and business property.
An MBP Business Advisor can talk you through all the different options for structuring your business as a part of your Proactive Accounting Meeting, so get in touch to set one up.
Validate, Plan, Execute.
Don’t quit your day job until you’ve done your homework. Reading this article is a great first step so your on the right track. Now, validate that your idea is viable and can generate the income you need to suitably replace your employment. Once you have validated it, plan on how you will make this viable idea a success. Then once the planning is all done, execute it through the actions outlined in the plan. If you need a hand with the planning and due diligence then get in touch with the team at MBP.