Running a business is hard work as any business owner knows only too well. There are staff to think about, cash flow to worry about and the ongoing pressure of keeping work flowing in. We get it, we are running a business too! However there are some basic things you can do for your business to avoid unnecessary stress in both the short and long term. The top five things you need to avoid are:
1. Not having a constitution.
A constitution, which is filed at the Companies Office, is a basic document setting out how the company is to be governed. Without one the company cannot indemnify the directors for any personal liability they incur in manging the business.
Personal liability of directors is on the rise, particularly in light of the new health and safety legislation. By filing a constitution and signing a deed of indemnity business owners can pass any personal costs they incur directly to the company.
2. Failing to protect your personal assets.
Many business owners incur the expense and hassle of setting up a family trust and transferring their personal assets to it in order to protect them from commercial risk, which is a great start.
It’s also common to see trusts guarantee commercial lending and granting security over the owner’s personal assets. In some instances, there is no getting around this if the business assets are not sufficient to meet the bank’s credit requirements. However, it is always worth pushing back in the first instance and asking the bank to justify its position or better still – seeking a second opinion from another bank. You’d be amazed what a bit of competition can achieve!
We also see many trusts that are not properly administered. The classic example is where the family home has been transferred to the trust but the value has not been forgiven, meaning that the trust owes a debt to the value of the property. This debt is now an asset of the business owner that is available to meet their personal liabilities. The worst case scenario here is that the trust is forced to sell the home to meet those personal liabilities. The solution to the issue is quick and cheap by the business owner formally forgiving the debt.
3. Granting personal guarantees.
As a business owner, you are unlikely to be able to avoid providing a personal guarantee to your bank. You can, however, be diligent about not providing them to others, such as suppliers of good or services. Often personal guarantees are imbedded in the fine print of the terms of trade you are asked to sign – check them carefully and don’t be afraid to question it! You’d be surprised how often your suppliers will waive a personal guarantee to ensure your ongoing custom, and if not – maybe their competitors will!
4. Neglecting to enter into a shareholders agreement.
We know that when setting up a business there is often very little money or time to think about getting a shareholders agreement drafted. Despite this, engaging in the process to ensure critical matters are discussed and agreed is crucial to your business planning.
In the absence of an agreement, there is no obligation on an exiting owner to offer their shares to any other owners or, on death, pass their shares to their estate. There is also no mechanism in place for dealing with disputes that can cause irreparable damage to the business. Shareholder agreements need not be overly complicated or costly. What is complicated, messy and costly is to have to apply to the court to resolve issues or worse yet, liquidate the assets.
5. Not Securing your shareholder advances.
Typically, businesses raise money in two ways – from a bank or by the owners injecting funds. When owners advance funds to their business, they are just as entitled to protection as any other creditor by taking security over their business assets. This will rank them ahead of all other unsecured creditors in the event of liquidation, in some instances, even ahead of other preferential claims such as amounts owing to the IRD or for wages, holiday pay or redundancy pay.
The New Zealand system of creditor priority is based on the concept of notice. Lenders and suppliers to your business have the ability to search for any security you have taken over your business assets on the Personal Property Securities Register (PPSR). This gives them the opportunity to assess whether they will require security before they sell goods or lend money to the company. It is a simple and low cost process for business owners to protect themselves in this way by simply registering a general security agreement on the PPSR.
Are you starting a business? Start out the right way and get in touch with an awesome commercial lawyer today! Wakefields has a team of great lawyers ready to help you on this exciting journey. We’re only a phone call or email away – 04 970 3600 or email@example.com.