How to Set Up Your Business Compliance

Firstly, What Is Compliance and Why Does It Matter?

Business compliance is the act of complying with the rules and regulations for your business, its associated industry, and government/IRD rules and regulations.

The reason it’s so critical that businesses be concerned with complying is that any negligence of business requirements can lead to a raft of issues. These will commonly impact employees, customers/clients, and overall business success. However, for business owners, there is also the risk of fines and jail time in areas of non-compliance or mismanagement.

With this in mind, let’s begin setting up your business compliance.

Start by Finding Your Business Type

Before acquainting yourself with the many compliance considerations, you need to define what type of business you’re running. 

If you find it difficult to pin your business type from the options below, it’s always smart to seek advice from an accountant. But to get you started, here’s a list of the most common structures.  

Sole Trader

This business type was created for individuals who trade under their own name or a business name without becoming a formal legal entity such as a company.

Advantages

• The simplicity.
• You avoid the costs and formalities involved in establishing and operating a separate legal entity.
• All profits go to you, the sole trader.
• You can offset business losses against other income you may have earned.
• You will be taxed at the usual marginal rates.

Disadvantages

• Liability is unlimited.
• As your income grows tax rates can become a disadvantage.
• You may have difficulty splitting income with family members who are also involved in the business.

Partnership

A partnership is where two or more people/entities share ownership of a business, its resources, and each other's skills.

Advantages

• The simplicity.
• Any losses can be passed on to the partners.
• Often cheaper to set up than a company or trust.

Disadvantages

• Liability is unlimited as each partner is responsible for all debts of the partnership.
• If there is a partnership agreement, you must comply with it along with the partnership law.
• All income is distributed to the partners each year - none is retained in the partnership. This can lead to higher taxes.

Company

A company is a separate entity. To be a company in New Zealand, you must be registered with the Companies Office.  

Advantages

• As a shareholder, your liability is limited. 
• Companies are well understood by financial institutions, suppliers, and customers.
• Income splitting with family is more easily achieved (salary, dividends, etc.).
• You have a flat company tax rate of 28%.
• You get tax advantages like availability of imputation credits. This ensures you don’t pay tax twice on company profits when drawing them as dividends.

Disadvantages

• The costs and formalities of establishing and operating a company.
• Higher costs for accounting than that of partnership/sole trader businesses.
• Directors are often required to give a personal guarantee for the company such as when applying for loans or credit applications with suppliers.
• Company losses can’t be passed on to shareholders (though they can be carried forward and applied to future profits).
• Legal and regulatory requirements apply to both companies and directors.
• The flat company tax rate may result in higher tax liability than progressive individual rates.

Trusts

A trust is a legally binding arrangement to deal with and administer trust property. The parties involved are a settlor, trustee(s), and beneficiaries.

Note: before involving yourself with a trust, it’s worth chatting with a solicitor about whether using a trust for asset protection is right for you.

Advantages

• Relatively flexible.
• Possibility to distribute profits unevenly to beneficiaries (so long as the trust deed allows it) which can lead to tax savings.
• Can protect your assets from creditors and lawsuits.

Disadvantages

• Compliance costs such as needing a solicitor to set up your trust and draft a trust deed.
• Ongoing costs such as legal assistance where signatures and paperwork are required for loan applications.
• Further set-up costs such as transferring assets into the trust.
• If you don’t know someone who’ll do it for free, you will need to pay for an independent trustee (there are people who offer this service for a small fee).
• Trust structures are not well understood by financial institutions which can make borrowing difficult.
• Accounting fees can be more costly compared to other structures (depends on the number of beneficiaries and complexity of the trust deed/business operation).
• Profits must be distributed to beneficiaries each year or be taxed at the trustee rate of 33%.
• Losses stay in the trust but can be applied against future trust profits.
• You must comply with the trust deed and the Trusts Act.
• Strict record keeping is required right down to small matters of day to day action. 

Look-through Company (LTC)

This structure is a special type of company. Though it’s a separate legal entity, when it comes to income tax purposes it’s treated like a partnership. This means profits are distributed to shareholders each year.

Advantages

• Shareholders can claim the company’s tax losses.
• Profits are taxed at shareholders’ marginal tax rates.

Disadvantages

• Limited to no more than five owners.
• Shareholders must guarantee all income tax will be paid.
• Possible additional costs for maintaining company records in order to meet compliance requirements.
• If significant profits are made, passing all the profit out to shareholders may become undesirable as it will lead to a higher tax rate than if the LTC was a Company (33% versus 28%).
  

Next up, the Important Registration Details 

Once you know what type of business you’re running, it’s time to make sure you’re set up for all of its requirements. Here’s what you’ll need to look at.

New Zealand Business Number (NZBN)

No matter what structure you’ve chosen for your business, you should apply for an NZBN.

Your NZBN is a unique number for your business that will allow you to connect with other businesses and share information such as contact details and GST registration details.  

Check out the NZBN website for more information and how to apply.

Inland Revenue Department (IRD)

To effectively manage your business and lodge returns when required, you need to register your business for a myIR account.

When it comes to IRD numbers, what you need varies depending on your business structure. Sole traders, for example, will use their personal IRD number as their business IRD number. However, if registering as a partnership, company, or trust, you will need to apply for a separate IRD number.

To get a business IRD number you firstly need a myIR account for your personal IRD number. The registration process is simple and the same for both personal and business accounts. To register, head over to the IRD website.

Companies Office Registration

If your business is going to have a company structure, you must register your company with the Companies Office. You can either do this yourself or have an accountant do it for you. 

The process follows a few steps:

1. Choose the company name.
2. Check to see whether the name is available with the Companies Office.
3. Upon confirmation, complete the registration.  

Fortunately, this registration process also gives you the chance to complete other business registration processes such as applying for the company’s IRD number, registering for GST, registering as an employer, or nominating your tax agent.

Here’s what you’ll need when registering:

• Your RealMe login.
• The name, residency address, date of birth, place of birth, and IRD number of each shareholder and director.
• How many shares you want to have in your company and how many will be issued to each shareholder.
• Whether you have an ultimate holding company.
• The BIC code applying to the main activity your company will engage in.
• For those registering as an employer, you’ll need to know when you’ll first employ staff and whether they’ll be provided with benefits that incur fringe benefits tax.  

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Note: if you intend to only hire contractors (who will invoice you), you may still need to register as an employer. This is because certain industries require you to withhold tax from contractor payments and pay it to the IRD as you would for an employee. The list of industries/jobs this applies to can be found on the last page of the IR330C form.

Goods and Services Tax (GST)

Not all business entities need to register for GST. However, sometimes it’s worth registering anyway to reap the benefits of tax claims.

You must register for GST if...

• Your business carries out a taxable activity and your turnover was $60,000+ in the last 12 months.
• Your business carries out a taxable activity and you expect your turnover to be at least $60,000 in the next 12 months.
• You carry out a taxable activity and add GST to the price of the goods and services you sell.

Should you register for GST, you will also need to choose your accounting basis and filing frequency. Here are your options for each.

Accounting basis

• Calculate GST on a payments basis (what you’ve actually received/paid).
• Calculate GST on an invoice basis (what you’re expecting to receive/pay).
• Calculate your GST on a hybrid of the two options (here the invoice basis is used for your sales and the payments basis for your purchases).

Note: if your turnover is likely to be more than $2 million you can only choose an invoice basis.

Filing frequencies 

• Monthly
• 2-monthly
• 6-monthly

Note: the most common choice is 2-monthly. This timing is additionally beneficial as it works nicely with AIM returns should you choose to enrol.

Now for a Rundown of Provisional Tax 

Provisional tax is a payment method where, instead of paying a lump sum of tax at the end of a year, you pay in several instalments that anticipate your annual profit and tax liability. It’s compulsory to use this method if your previous year’s tax return was $5,000 or more.

Luckily for new businesses, the IRD won’t ask you to pay provisional tax during your first year of operation as neither of you know your annual earnings. But, that doesn’t mean you don’t have to pay tax...

Instead, you’ll have to pay a lump sum at the end of your first year and will possibly be met with a provisional tax payment early in the next year. For new business owners who are unprepared for tax, this can come as a double whammy.

This is why tax management is essential. It’s good practice to put aside money for tax payments from day one. Here are two ways you can do this:

1. Calculate your net profit each week or month, take away 28%, and put it into a separate bank account. This is simple to do in Xero if your bank reconciliation is up to date. 
2. Enrol in the AIM provisional tax option. This allows you to pay income tax at the same time as GST (every two months). It’s calculated based on your year to date profit. If the calculation ever comes out as negative the IRD will refund the amount.  

We particularly enjoy using AIM not only because it’s the best way to avoid the double-blow tax bill at the end of your first year. It also aligns closer to your cash flow and gives you peace of mind that you are on top of your tax management.

There are, however, rules around who can use AIM and cases where it’s not the best option. So, if you’re considering registering, it’s definitely worth discussing the idea with a professional first.

Let’s Prepare Your Bank Account Structure

The easiest way to handle cash flow is to have separate bank accounts for separate payment needs - instead of storing it collectively in one place.

You could, for example, have the following accounts:

1. Main transaction account.
2. GST savings.
3. EMP savings (for ACC payments, annual leave accruals, and PAYE).
4. Income tax savings.
5. Supplier payments.
6. Rainy day/capital projects.
7. Covid wage subsidies.

Moving cash to these accounts on a weekly or fortnightly basis is ideal and best timed with your payroll so that you can establish a finance routine. 

If you’re running a business where your customers pay at the time you provide your goods/service, this finance system/routine will be particularly useful for ensuring you have enough money set aside to pay your outgoings.

However, if you’re offering credit terms to customers, you’ll need to determine how much working capital is needed until customer payments are received.

Build Health and Safety Measures

The penalties for lack of health and safety compliance can be huge and, in severe cases, include jail time. For this reason and for the sake of maintaining happy staff, customers, and a thriving business, all owners should ensure their business is complying to its health and safety requirements.

To begin, you will need a health and safety policy. But that’s not all. You’ll also require processes for staff induction and training, managing hazards, reporting incidents, and dealing with any pain or discomfort of your team.

Whilst you can find templates online or plagiarise another company’s policy, it’s best you have your own created. Why? Too often we see businesses miss regulations and ongoing requirement changes due to taking shortcuts in their creation of H&S measures.

If it’s the time-consuming nature of creating H&S measures that’s keeping you from getting started, it’s well worth having a specialist develop and implement your policy. Choosing this option is smart as the good ones will also keep you updated/compliant when changes are introduced.

Establish Human Resources Support

Managing staff these days is a complex process. There are countless rules and regulations in place to protect both your business and your team. For this reason, providing specialist human resources support is essential for avoiding penalties and personal grievance cases.

Additionally, what you gain from employing this support is having someone to provide you with advice on handling situations. For owners, this can be comforting and give you confidence that you’re doing the right thing in the right way.

Don’t Forget Insurance Coverage

When looking at insurance, a good place to start is by speaking with an insurance broker. These guys are specialists at giving you guidance and invaluable insight into the differences between policies and insurers.

Types of insurance you may need:

• Public liability
• Material damage
• Professional indemnity
• Vehicle cover
• Cyber liability
• Key person
• Life/trauma
• Income protection

Need a Hand in Setting up Your Business?

So you’ve read through our guide for setting up business compliance. Great work! But there’s a chance you still have unanswered questions - or perhaps new ones of your own. Where now?

Chat with someone who can help. Here at No Fuss Business, we specialise in business development and helping new ventures stand up and start walking. No matter how big or small the question, get in touch with us today for help on your business journey.