Setting up a business? These are the top 4 things you should talk to an accountant about before starting a business or side hustle

(before you even have a company name, logo or product / service)

1. Business Structure - Understand the advantages and disadvantages of different business structures like sole trader or limited liability company

2. Tax Implications - Understanding how much tax to put away, when you need to register for various taxes and when everything is due

3. Setting up Banking for Success - Using separate bank accounts for business and using fintech solutions like Wise or Stripe to save on fees and automate billing

4. Expenses - Understand what expenses you can claim, and what expense are a mixture of business and personal

1. Business Structure

So you want to set up a business - great, first thing you want to do is decide your structure, the most common structures are

1. Sole trader or

2. Registered company

As a default position, I'd suggest a sole trader, it's the least compliance and the easiest to setup.

Sole Trader

A sole trader is essentially trading as yourself, you can trade under a different name, however the legal structure is just yourself and any income you make goes on your own tax return

Pros

• It’s easy to set up — you can get up and running quickly

• Start-up costs are low — there are no legal or registration fees

• You control the business and get all the profits

• You can offset losses against other income.

Cons

• You’re liable for all debts — this may put your personal assets at risk

• It’s harder to grow a sole trader business

• Getting loans or investment can be more challenging

• It’s harder to sell as a working business.

Company

A company is a separate legal entity with its own separate tax return

Pros

• Shareholders’ liability is limited to the amount they paid for their shares

• Your tax rate is lower than top personal rates

• You have more credibility in the market

• It’s easier to sell a business because it’s a separate entity

• The business can grow indefinitely — it’s not tied to one person

• It’s easier to get funding and investment.

Cons

• There’s more regulation than for sole traders and partnerships

• Companies can need more investment to grow

• Directors need to understand their responsibilities.

2. Tax Implications

Any business or side hustle making money has to pay tax. Yes it's unfortunate, but the more tax you pay, the more money you made.

Income Tax

For a Sole Trader the tax rates and approximate tax to pay are as below. A few things to note

1. Tax Brackets: New Zealand uses a progressive structure with multiple tax brackets. As your income increases, you progress through these brackets and are taxed at higher rates for each subsequent bracket.

2. Not Your Entire Income: It's essential to understand that when you move into a higher tax bracket, only the income above the threshold for that bracket is taxed at the higher rate. The income below the threshold is taxed at the lower rates of the previous brackets.

3. Total Annual Earnings: If you currently earn $70k through your salary and $30k through your side hustle, the $30k will be at the 33% tax rate.

For a Company the tax rates and approximate tax to pay are as below. A few things to note

1. Tax Rate - You will notice after about $150k a company appears to pay less tax than a sole trader. On the face of it, that is correct but any money the company makes belongs to the company. If you want to take this money out of the company you need to either take a shareholder salary or pay a dividend and then pay the top up tax between the company and your marginal tax rate if applicable

GST

Once you cross $60k of revenue in the preceding 12 months you must register for GST, or you can do this in advance if you intend to cross $60k of revenue in the next 12 months.

The benefits of registering for GST is that you can claim GST on any costs you incur that have GST - if you're just setting up a business it is likely that your first few returns will be in a refund position.

The major con for registering for GST is that you need to pay 15% GST to IRD on of all of your NZ sales. A few things to note to help with this

1. If your business is mainly B2B make sure your pricing is XYZ + GST. This means that you just pass the GST cost onto the customer

2. If your business is mainly B2C pricing is usually GST inclusive so I'd suggest raising prices by 15% to cover your margins. If your product was previously $50, I would suggest raising to say $60 inclusive of GST so you don't end up out of pocket

3. If your business sells to overseas customers these sales are Zero rated. What this means is that you don't need to return the 15% GST to IRD.

I would suggest registering for GST on a 6 monthly payments basis to reduce the compliance headache.

3. Setting up Banking for Success

The right banking setup can make managing your finances seamless.

Bank Accounts (ASB, BNZ, ANZ etc)

For a sole trader, all you need to do is add a couple of new suffixes to your existing online banking. For a company you'll need to create a separate business account

I suggest the below accounts

1. 01 - Cheque - This is the account that customers pay you into. We keep this separate to the expenses account just in case the debit card is lost/stolen/compromised the rest of your money is safe

2. 02 - Expenses - This is the account you pay all your expenses out of, link a debit card to this account

3. 03 - Taxes - Where you put aside your taxes until it is due. How much do I put away? See the Income Tax Section above to work out how much you should put away

4. 04 - GST - 15%

International Transactions (Wise)

For international transfers I would highly suggest Wise. The fees on international transfers are significantly cheaper than a standard bank and the interface is much easier to use

Online Transactions and Subscriptions (Stripe)

For taking payments online or subscription products would highly suggest Stripe. The fees, integrations and support are better than Paypal.

Credit Cards

If you're looking to put through considerable spend through advertising I'd suggest putting this on a credit card for a couple of reasons

1. Delayed payment terms - if you pay using a debit card the money is taken out of your account same day, if you pay on a credit card you don't need to pay that card off for 30-45 days depending on the card

2. Points / Airpoints - assuming the merchant doesn't charge you a credit card fee (Facebook, Google etc don't), you can literally get free points to spend on card charges, travel, accommodation etc

Remember with credit cards to pay them off each month as the fees can quickly get out of control, only proceed if you are sure you can pay these off in full each.

4. Expenses

With costs you need to make sure they’re actually business related, the biggest rule of thumb is would you have bought this even without business, if the answer is yes, its likely not business related.

• Essentially do I need this expense to run my business?

• Does this expense help me generate income?

• If I stopped this business would this expense stop?

Other things to think about which can be claimed

• Home office expenses

• Work-related mobile phones and phone bills

• Depreciation on items like computers and office furniture

• Entertainment*

• Accountant and tax agent fees 😉

• Entertainment is always a contentious one - a few examples

• Taking a client out for coffee - yes but 50% deductible

• Your own morning coffee - no

• A work team lunch - yes but 50% deductible

• Your own lunch - no

• Your own lunch while traveling out of the city for work - yes 100% deductible

With that in mind there are a few legitimate deductions you may be able to claim

1. Home Office: If you legitimate use a home office in your business and your home office is 4m x 4m you can claim 16 x $51.05 being the sqm rate by IRD = $816.8

2. Mileage: If you legitimately used your personal car for business and have sufficient records you can claim the number of km (eg 1,000) x 0.95 being the mileage rate by IRD = $950.00

In conclusion, a small investment in time up front, can save hours of pain and money down the line come tax time. I'd always suggest speaking to an accountant before venturing on a new business.