Setting up for the future

If you work for yourself in the creative sector, chances are that you are your business, and your business has been built around what you have to offer. But are you set up for the future?

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If you work for yourself in the creative sector, providing services or selling things you create, chances are that you are your business, and your business has been built around what you have to offer. But are you set up for the future?

Arts manager and chartered secretary Yee Yang 'Square' Lee explores the structures needed to grow your business.

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Consider this: does how you do business today allow you to grow your business tomorrow?

Take a moment to think about how you started working in the creative sector. Did you start off working for someone, an organisation or a company? Were you an employee or a freelancer? Do you own a business? Now think about the work you do in the creative sector today. Are things growing? If the answer is yes, then perhaps it is time to consider whether your business is set up with the right structure for the future.

Why does business structure matter?

It is likely that when you started out, the question of which business structure is best for what you do, or want to do, took a backseat as you focused on doing a great job to make a decent living.

Different structures have different advantages but also have different limitations, requirements, responsibilities and liabilities. You should choose how you want to operate your business, not let the business structure dictate how your business is run. It is important that you choose a structure that suits your needs and activities. Keep in mind that business structures are not one-size-fits-all and don’t forget to consider future needs on top of ongoing requirements.

Choosing a business structure can be a mystifying process, but it is critical to put the right structure in place for your business as it will affect your startup and operating costs, legal obligations and liabilities, administrative and compliance requirements, ability to raise finance or seek funding, protection of your assets, tax status and the continuity of your business, among other things.

It is best if you have the most appropriate business structure in place from day one, but your needs may change as your business grows, including how your business is structured. While you can change business structures at any stage, it will be more expensive and complicated the further down the track you are. (If you are moving towards a structure that offers limitation of liability, be mindful that any liabilities that exist before your business structure change are likely to still apply.)

You may be in business, but are you aware that you are a business?

Whether you are an artist, manager, technician, actor, designer, entertainer or administrator, if you work for yourself in the creative sector, providing services or selling things you create, chances are that you are your business, and your business has been built around what you have to offer.

Other than getting an IRD number (if you don’t already have one) and working out whether you need to be GST-registered, there are no formal or legal processes required to become a sole trader,  it allows you to start and run a business easily, even employ others in your business. You possibly haven’t even made a conscious decision on what business structure to use, but as soon as you (as an individual) start providing services or selling things for a profit, you’re in business as a sole trader.

Being a sole trader is in many ways the most flexible and simple form of running a business, as it allows you full control, management and ownership of your business, including being entitled to all of the profits you earn (less tax). For the reasons above and more, it is unsurprising that sole trading becomes the default business structure for many of us in the creative sector, who just want to focus on what we are doing, keep our costs low and setups simple.

But beware: being a sole trader also carries the highest level of personal risk and liability as there is no separation of legal identity between your business and you. A sole trader is personally liable for all business taxes, debts and losses. Sole traders are also open to lawsuits and disputes that may put personal assets at risk. If something goes wrong, it could be your house, your car or your savings that you lose. Bankruptcy is a real possibility.

Have you outgrown being a sole trader?

It may be time to reconsider carrying on business as a sole trader if:

  1.  you have major increases in your business activity, profit and assets; or
  2.  you want to attract investment, raise financing or take out a business loan; or
  3.  your ambitions and plans for the business are moving away from small-business to something  more; or
  4.  you are concerned about your personal liability and wish to have better protection of  your assets.

But what structure should your business transform into?

The next stage – partnership or company?

Sole trading businesses commonly evolve into either partnerships or companies.

As a creative, you may choose to work with others who complement your existing skills and abilities, to achieve greater results. Such creative collaborations can be done via a partnership, without having to navigate the formalities required to establish a company. For example, a web developer may benefit from teaming up with a graphic designer (and vice versa), or the pair of them may choose to work with an ad executive to create bespoke solutions for clients.

Basically, a partnership is formed when two or more persons or organisations come together to run a business together, but not as a company, sharing in the profits and liabilities of the business, usually based on terms defined in a partnership agreement (highly advisable!).

Partnerships allow you to work with others by merging your respective skills, expertise, resources and assets into one jointly-owned business, without having to incorporate as a company. Partnerships split income between the partners, who each get taxed personally on their share of the revenue; the partnership itself is not subject to tax. Partnerships may or may not need to be GST-registered, depending on its turnover.

Partnership businesses (with exception of Limited Partnerships) do not have a separate legal identity, so the downsides of being a sole trader apply generally to partnerships, with an added risk: you could be liable for debts and liabilities incurred by any of your partners! Learn more about partnerships via Business.govt.nz.

Alternatively, you may decide to take your business a step further by incorporating a company, particularly if you are ready to scale up your business activities and/or output, are seeking to raise some capital and/or want to protect your personal assets as well as limit your liabilities. For example, an independent producer wanting to take a show on tour may choose to channel all tour-related business activities, funds and liabilities through a company, not only to limit his/her personal exposure to the venture but also to use the company as a vehicle to raise funds, say by taking a loan or attracting investors, for the tour.

In legal terms, a company, whether a limited liability or public company is a business trading with a distinct legal identity from its owners (shareholders). A primary advantage of a limited liability company is personal asset protection. Business owners can receive income from the profits of a company (either as wages or dividends) but are accountable for the debts and liabilities of the business only to the extent of their investment in the company. Any profits made by the company is taxed at the company tax rate; if your  company turns over (or is planning to turn over) more than $60,000 a year, then you will need to have the company registered for GST.

Limited liability companies are the most popular form of business structure in New Zealand as they generally have greater credibility in the marketplace and are more attractive to investors. Learn more about companies via Business.govt.nz.

Other types of business structures

There are special instances when you may consider a more sophisticated or less common business structure. These include:

  1. A trading trust – an alternative to owning and operating a business, where a trust, being an entity that holds property, assets or income for the benefit of others, actively trades for profit;
  2.  A limited partnership – a type of partnership involving general partners (who are accountable for all debts and liabilities of the partnership) and limited partners (who are only accountable to the extent of their capital in the partnership;
  3. An incorporated society – a group or organisation governed by a set of rules and run as though it were an individual person, where members do not have any personal financial interest in any property or assets of the entity but in return receive protection from personal liability; or
  4. A charity (unincorporated, society-based, trust-based or company-based) – an entity set up with charitable aims that has separate legal identity from its members or trustees, which cannot be for private profit.

If you are considering any of the four structures above, you should seek specialist advice from an accountant, tax advisor, lawyer, business advisor and/or company secretary.

Grow your (business) structure to structure your growth

Typically, for a business – large or small – to grow, a combination of elements must be in place: resources (money, material, equipment, etc.), ability (skill, expertise, innovation, etc.), value (demand, point of difference, quality, etc.) and opportunity (market gap, new markets, etc.). Underpinning all these however, is the need to have an appropriate business structure.

To an extent, as creative entrepreneurs, you are your business regardless of what structure you choose for your creative ventures, and to make it thrive, you need to think about the future. Having a working understanding of the various structures available can help you grow – or plan the growth of – your business more efficiently and successfully.

So ask yourself again: is your business set up correctly for the future?

Whatever your answer might be, I recommend you consult your accountant, lawyer and/or trusted professional advisor, or at least read up on freely available publications such as the NZTE’s guide to starting a business, before making any decisions on your business structure!

Written by

Yee Yang 'Square' Lee

27 Mar 2013

Interests Square

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Yee Yang 'Square' Lee is here to answer your questions on business structures, or even governance-related matters. "Feel free to fire them through and I'll do my best to help!"
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This exercise will help you identify the practical implications and considerations when growing from a sole trader into a partnership or forming a company.
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This exercise will help you to better understand your business and match your needs to a business structure. Think of this as a business health check.