March 23, 2015 Original article
Calling the shots, prospects of more money, career flexibility or the opportunity to bring a clever product to market are just a few reasons for launching a small business. Or perhaps you’ve taken a redundancy and feel the time is right to join the 2 million Australians who are having a crack on their own.
Many small enterprises fail in the first few years, so it requires careful research and planning. Typically this means developing a business plan that outlines your goals and how you intend achieving them. It is also a must if you’re seeking finance. To find out more visit www.business.gov.au.
As part of your business planning, you need to decide whether to operate as a sole trader, partnership or company.
This is the simplest structure. It’s inexpensive to set up because there is limited red tape. All you need is to obtain a tax file number (TFN) and, if your “GST turnover” (see the tax office website) is more than $75,000pa, register for the goods and services tax (GST). Registering for GST requires applying for an Australian business number (ABN), which is free from the government’s Australian Business Register. Superannuation is also your responsibility and you can claim a deduction for any personal contributions, which are limited by your age.
As a lone ranger, you’re legally responsible for all aspects of the business. Its debts and losses, for instance, are problems you must solve, as is keeping decent staff. If you want to build the business, lenders may be more reluctant to give you finance, while you can almost forget the prospect of selling a solo operation when the time arrives to take down the shingle.
A partnership is where two or more people band together to start a business. You can operate under your own names or use a business name, which must be registered with the Australian Securities and Investments Commission (ASIC) (about $34pa). It also requires its own TFN.
All profits are shared by the partners, who pay tax at their marginal rates. All partners jointly own the business and its assets. Pooling resources can make it easier to secure finance, manage existing clients and chase new business. On the flipside, liability is unlimited and shared equally between partners. If something goes wrong and the business is stumped for cash, creditors can jump in and make claims against personal assets such as your home. So choose your partners carefully.
Setting up a company can provide more protection against some of the issues faced by a partnership. A company is a separate legal entity capable of holding assets in its own name and conducting business in its own right. Generally, the shareholders’ personal assets can’t be accessed to pay for company debts or liabilities. However, there might be exceptions, especially if fraud or negligence are involved.
That said, lenders are more likely to look favourably on a request for finance and the ability to sell a company is arguably higher than a business structured as a sole trader or partnership.
To become a company, an entity must be incorporated under the Corporations Act 2001 (Commonwealth Act) and be registered with ASIC. This means that it must have an Australian company number (ACN) in addition to an ABN and TFN. If you’re establishing a private company, expect to pay $457 for an ACN. It must also register its business name and for GST.
A company has its own income tax liability, which is totally separate from the income tax of individual shareholders. A company pays income tax at a flat rate of 30% (possibly to fall soon). You can manage the tax liabilities by paying dividends or reinvesting profits in the business.
It typically costs between $1500 and $2000 to establish a simple company structure, while the ongoing compliance costs (for company reports, business activity statements and company tax returns) will depend on its size and scope.
Anthony O’Brien is a small business and personal finance writer with 20-plus years’ experience in the communication industry.