It costs a few hundred dollars to form a limited company but despite that, many thousands of Kiwi’s continue to start businesses as sole traders or even worse, partnerships. In more than 30 years of looking after small businesses I’ve seen so many unfortunate and unnecessary situations and countless examples continue to crop up, so here are a few I’ve seen in the last year or so.
1. Outstanding GST. It’s a fact that the IRD in NZ are rubbish at collecting tax, so much so that many business owners use the IRD as a source of finance. Take a new client of mine in Hawkes Bay, a husband and wife partnership who now owe $85,000 in GST. Their business is failing but guess what – as a partnership they are fully liable personally for ALL the GST. If they were a limited company they could have walked away. Bankruptcy and ruin beckon……………
2. Accounts Receivable. Another husband and wife partnership client has received a demand for $175,000 from the liquidator of one of their former customers, who says they have to repay the money they legitimately received for sales made. Ridiculous maybe, but as a partnership they are fully liable and needless to say, they haven’t got $175,000 sitting around!
3. Legal Claim. Another client, a sole trader, was on the receiving end of a totally unexpected claim of $260,000, and guess what, his insurance company refused to pay up! Bye-bye house!
4. Partner’s Debt’s. Another client was in a two-man partnership. His business partner ran up debts willy-nilly and then cleared off. Guess who had to pick up the tab for the partner’s debts?
And it’s not just debt or financial ruin that makes a limited company so valuable:
5. Self–Employed Status. We are very lucky in NZ. You can trade as a limited company yet still retain your self-employed status so it’s crazy not to take advantage of this.
6. Tax. Both sole traders and partnerships are pretty useless for income-splitting to minimise tax. A company, on the other hand, is far more flexible.
7. Ease of Ownership Transfer. It’s so much easier to transfer wealth or assets when you have a limited company. No legal fees or tax issues to worry about!
Business is risky, so why take any more risk than you need to? If you need help with your business contact Nick on 0800 ASK NICK or email email@example.com.