Start-up failures may be due to vague wording

Vague wording around a start-up company’s tax obligations in the first year of operation may be a significant factor behind why most New Zealand start-ups fail within two years.

Director of Auckland-based accounting and business advisory firm NexGen Group, Vinay Iswar, says he’s lost count of the number of business owners who have turned up at their firm in despair because they understood their first year of trading to be tax free.

“The two-year timing for failure is not a coincidence – it’s the time when fledgling business owners get hit with the realisation that they have to pay GST, plus terminal tax from their first year in business, plus provisional tax for the year ahead. A double ACC levy is the cherry on top.

“I’m not blaming IRD. Too many business start-up owners try to do it all on their own, so they rely on their own assumptions and interpretations, or what their mates tell them. We also see a lot of people who simply believe that if they ‘build it, the customers will come’ – blind faith and taxes are not a recipe for success.”

Iswar says too many start-up owners don’t have a business plan, they don’t consult an accountant or business coach or mentor, and they don’t do their market research. The consequences are that failure is almost inevitable.

“More than 75% of new clients who come through our doors – 3 out of 4 – have already started the company, or left their job, or opened a shop, and they haven’t registered for GST.”

Barriers to business entry are too low

Iswar says he is not advocating making it tougher for ordinary New Zealanders to start a business, because ultimately that’s a good thing ¬– but some prior education and perhaps a requirement to submit a one-page business plan could be part of the company registration process.

“Something simple – like going for your learner’s licence – at no additional cost, would alert start-up entrepreneurs to their tax and ACC levy obligations. Nobody reads brochures and flyers and the wording needs to be improved anyway.”

Employment contracts could also be another reason why start-up entrepreneurs are so poorly prepared.

“Employment restraints of trade preclude a lot of people from doing the necessary preparation – like planning and research – ahead of launch. And then when they leave, they have to hit the road running because they have to feed the family; they’re not thinking about taxes and GST at that stage,” says Iswar.

“Sometimes the business takes time to start earning at first, so they’re living on savings and spending everything they earn. It becomes a habit. Then suddenly – for many types of businesses in New Zealand – everything slows over December and January, and they realise that they really only have ten months of the year to trade.”

Iswar recommends anybody contemplating starting up a business take the following steps:

1. Consult an accountant, business coach and or mentor to understand your tax and other compliance obligations.

2. Write a one-page business plan listing your goals, vision, a simple budget and how you intend to find customers.

3. Get an understanding of how shareholder structure can impact your tax obligations.

4. Invest in accounting software.

5. Research your target market.

6. Start saving a portion of your earnings for taxes now.

“Do those things and you’re already ahead of 95% of other business start-ups. Being good at what you do is not the same as being good at business – you have to be good at both to succeed,” says Iswar.