Small businesses can incur big costs

Professor Jens Mueller
Good Business

 When you’re Paul the Plumber, are you a business?

I love it when these creative artsy people design new logos for businesses – it makes even the smallest business look flash and substantial! You might work from home, or with a single tradie van, but, man, when people see that logo they think you’re having lunch with Bill Gates every day!

… and then comes the day when that flash logo and your new global name cost you your house!

See, in New Zealand we usually have 3 forms of how you operate a business. You are either a sole proprietorship (that doesn’t mean you must be alone or eat fish every day), a partnership (originally a group of people within the same profession teaming up, lawyers, doctors, etc.), or a corporation (registered with the Companies Office). Simply ‘being in business’ doesn’t mean you are a corporation. You must actually incorporate to be a corporation…

But Paul the Plumber is smart. He actually incorporated. He paid the $125 for his new company to the Government, quickly done by email and credit card in a few minutes, and since he now is a Limited Liability Company, he tells a client with a $400,000 claim over poor workmanship to – well, kinda forget about it, because his company has no money, and Paul himself is not the company, so: Go Away! Adios!

Paul is half-smart. He knows that customers, suppliers, the IRD: All can go after Paul the individual, to get money he owes. There is no shield between Paul and his business, because Paul is the business. His easy solution is to register a business as “Paul’s Forever Plumbing, Limited”.

That little add-on, the “Limited”, is magic in law. It signals to everyone that they are not doing business with Paul, but with a limited liability corporation.

When a customer sees “Limited” behind a name, they know it’s not Paul they are dealing with (who ever gave their kid the name Limited!), but a corporation. That means they know they cannot go after Paul as a person, but are stuck going after the A4 sheet, with the corporate name printed on it.

But – you must show customers that you ARE an incorporated business, by featuring the “Limited” everywhere.

Ahah, you say! It is a bad thing that Paul could hide behind a corporation’s veil anyways, he should be liable personally. Stay tuned – we’ll talk next time why New Zealand and many other countries allow the easy formation of companies. You may not like it, but it serves a purpose.

Meanwhile, send your questions to j@mueller.nz, and the best ones will get a reply here – and a free download link to a great business case book.



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