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- Legal -
by Simon Wilton
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 Being a business captain is not an easy job. There are so many hurdles to get over that it is impossible to be aware of them all. Here are the top ten traps awaiting small business owners and how to avoid them.
There are 3 common options when it comes to trading entity:
Sole trader - is the easiest because you have an existing IRD number, you don’t need to form anything, it is seamless from a tax point of view but you have personal liability and it is harder to bring in investors or partners.
Company – it is a bit more complicated but you do get limited liability (meaning the directors and shareholders are not liable for the company debts except where they provide security or are trading recklessly or insolvently). It is easy to bring in investors. A company does need to be formed, needs a new IRD number and has some complicated rules about its operations.
 Partnership – you probably would only choose this for tax purposes, no limitation of liability, still requires another set of books, a new IRD number and a formal partnership agreement is recommended. Often people will try to save costs up front by sole trading or with informal partnerships but these costs can be doubled when business grows and you realise you need a company.
Ensure that you are actually trading as a company, with the company name on all invoices, contracts , sign writing and letterhead. Otherwise you may be incurring personal liability anyway.
Either a shareholders’ agreement or a partnership agreement. In simplest terms these should at least set out a process if it all goes wrong. Especially with two equal shareholder companies it is incredibly difficult to resolve major issues without an agreement.
Using a company is a start but probably will not protect your personal assets from all your business creditors. Major suppliers will usually require a personal guarantee from the directors. By transferring your personal assets to a trust and some additional work you can at least provide some options if the business fails. It is not a failsafe method and creates some other issues, expense and complication but a trust can work if everything is done properly.
Check what you are signing as a director of a company. Sometimes the fine print will include a personal guarantee.
You need to get advice about all leases, as they are often the biggest liability a business will encounter. Usually they require a personal guarantee when a company is the tenant. A 6 year lease at $10,000 PA is in fact a liability to pay at least $60,000 over the 6 year term. There are often hidden costs including rent reviews, rates and insurance as well as maintenance obligations.
CPI rent increases over 6 years will increase the rent each year by around 2-3% compounding. So even at an average of 3% annual CPI increases result in a rent that is 16% higher in the 6th year. Market Rents will not always climb at that rate.
Terms of trade are the contract between you and your customers/clients. It should set out the nature of the relationship. Hopefully it will contain and limit your obligations and set out theirs. Terms of trade should contain credit arrangements, security and means of enforcing debts.
Once the terms of trades are set in stone, it's time to ask yourself whether you even allow a customer to incur a debt? Debt enforcement is not an issue with a cash up front approach. Does your business have to give credit at all?
If giving credit, assess the credit worthiness of customer, get references or assurances from their accountant, bank or other suppliers.
Have terms of trade which set out terms of credit, interest, security and enforcement. Be proactive and consistent in chasing your debts. Most business’ fail not because of a lack of profitability but because of bad cash flow.
If interested in a franchise, do your research first. Get specialist advice up front. Franchises are usually inflexible and expensive to get into but when they work are very effective. Just know what you are getting yourself into!
Employment agreements are compulsory. You must have them. There are other employer obligations. Get some specialist advice or if trying to save costs check the Department of Labour website. There is even a contract builder. Where you have a big staff and complex arrangements take specialist advice and generate a relationship with an advisor.
Lawyers aren’t always expensive and more often than not the right advice will save you more than it cost. You can often get free advice off web-sites and where you do some work yourself costs can be kept down. Once you have spent some money with a good law firm they will often give you free advice over the phone.
This article is intended to provide some general information only. It is not a substitute for specific advice and we recommend you take advice about your own circumstances from your lawyer.
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Personal assets exposed
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