Becoming Self-Employed

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Many people as they get older often think about giving up full-time paid employment to pursue a more congenial life style.  If you have worked in the same stressful job for thirty-odd years easing into another lifestyle through self-employment, perhaps having a shot at something you have always dreamed of doing can be very appealing.

Apart from making sure you have a carefully thought out business plan, are self motivated and have the right personality and organisational skills to be self-employed there are some legal aspects to consider.

Life-style change-seekers often think about businesses that they can run from home.  Working from home may be a good option for many small business operators but it does not mean that you are entirely free from all constraints.

You need to establish whether your proposed business is one that can be operated lawfully from your residence.  If the business involves doing IT work on a computer in the spare bedroom, no one is ever likely to complain and you will probably need no consent at all from your local council. However, if you commence a panel beating business in your garage it would be a different matter.  The rules about home-operated businesses vary from council to council.  There are some requirements common to all local authorities.  They usually include matters such as:

• the use of the home remaining predominately residential

• the activity being compatible with the amenities of the neighbourhood

• a limitation on the number of non-family members working from the premises

• provision of sufficient on-site car parking for visitors and staff

• limitations on noise, heavy traffic, retailing and a complete prohibition on many specific occupations (usually ones involving noise, smells, animals, use of chemicals and heavy machinery.

There is a range of activities that may be borderline and which will require an application for a resource consent. Generally, for example, it is not legal to operate a food business from a domestic kitchen.  Your plans to develop a business based on Granny’s secret chutney recipe may require a resource consent and a rebuilt and health licensed food preparation area.  You need to check out your own council’s requirements carefully to gauge your chances of success, and make allowance for the costs and time involved.

The usual health and safety requirements apply to a home based business as much as to one operated from separate commercial premises.  An employee who is injured having morning tea in your lounge will be in the same position as someone injured in a dedicated tea room at a factory.  

Unless you have left work with a large golden handshake or superannuation payout you may need a reasonable amount of money for business capital. How you fund the business requires careful thought.  If you have worked hard over many years to make your home mortgage free, do you really want to re-mortgage it and place a major retirement asset at risk late in your life?

Also you need to decide whether your business is going to be a major income earning exercise or just a small hobby business.  If you are likely to earn over sixty thousand dollars in gross income in a twelve-month period you must register for GST.  There can be advantages in registering even if it might take a year or two to reach that figure as you will be able to claim back any GST you have incurred in setting up the business.  Keeping proper records is essential for complying with your legal and taxation obligations.  

It is necessary to decide the legal structure for your business.  Are you simply going to be a sole trader, register as a limited liability company, or enter into a partnership?  If you already have a family trust, you should seek specialist advice to ensure your plans fit in with your trust, particularly if trust owned property is going to be used for business purposes, or as security for business borrowing.

It is simple to operate in your own name as a sole trader.  However, if the business fails with debts or incurs a legal liability, all your personal assets are at risk. A limited company does create a separate entity for your business.  In theory, if the business fails, your liability is limited to the company assets. However, there are special duties on company directors and many lenders and trade creditors will require personal guarantees that can make the concept of limited incorporated protection fairly illusory.  Partnerships should always be approached with caution.  If business partners fall out, it can be every bit as bad as a marriage break-up.  Also a reckless partner can place the personal property of all the partners at risk.

Overall, the best way to achieve the baby-boomer’s dream of independence and a new life style is to plan, investigate and organise long before leaving the well-paid job. That way the transition from wage slave to happy small businessperson will be as smooth as possible.

Disclaimer: The information contained in this article is of a general and summarised nature only.  It should not be used as a substitute for personal legal advice.

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