SO, YOU WANT TO GO INTO BUSINESS
It goes without saying that starting your own business is an exciting and perhaps stressful moment. It involves a lot of preparation and a lot of attention to detail that you may not have given much thought to. It can often be challenging to start your business and get your business off the ground if you are not adequately prepared.
This article is formulated to assist you in your journey in establishing your own business and to provide helpful business information for people looking to go into business, including business establishment, operation, and closure.
Establishing a Business
Whilst you could buy an existing business or purchase a franchise, in this article we are going to concentrate on how you can establish a business on your own.
Before you begin establishing your business you must develop a business plan, recognise the risks involved, be prepared and then determine a business structure which would most suit your business and it is at this point that you can adequately select the most appropriate method of establishing your business.
When establishing a new business on your own, you have three options as to how you establish the business:
Operating as a sole trader is the simplest of business structures. You must obtain an ABN. An ABN is an unique 11 digit number which identified your business and / or organisation and is relatively simple to set up through the ‘Australian Business Register’ website. The you may choose to register a business name, if necessary.
We shall return to registration of business names as this applies to all forms of business entity.
As a sole trader, you personally are the business. This means that you will be entering into all dealings in your personal name, you will be using your individual tax file number when lodging your income tax return or reporting business income and/ or expenses, which means that you will be personally liable for all the obligations of the business including any employee salaries, employee superannuation, debts and losses. You may choose to operate the business from your existing bank account, or alternatively establish separate bank accounts. There is no requirement to establish separate business accounts.
One of the key features of operating as a sole trader is that your business will be taxed as part of your individual tax return and you may be eligible for a small business tax offset. It is also one of the cost effective and simpler ways of conducting business. Further, as a sole trader you register for Goods and Services Tax (GST) if your annual GST turnover is over $75,000 in a single year. Whilst prior to going into business you may have completed your own annual tax returns you may consider engaging the services of a professional to assist once the business is established.
1) Have full ownership of the business.
2) Have full control of the business.
3) Simple and easy to set up and operate.
4) Cost effective.
5) maybe eligible for a tax-free threshold.
1) Personal legal liability for all aspects of the business including financial elements.
2) Personal liability for debts and/or losses and such cannot be shared with other business partners.
3) Personal liability to pay employees and employee superannuation.
In the alternative you may elect to establish a company. This can be done by first obtaining an ABN (as noted above) and choosing a company name. There are rules which must be adhered to regarding company names, including the prohibition of offensive and / or misleading names. You can then register your company online by completing a Form 401 through the Australian Securities and Investment Commission (ASIC) website at www.asic.gov.au. If you are not ready to register your company, but you have a name that you wish to reserve, you can reserve the name for a period of two months by completing a Form 410.
Once you have established your company, as with a sole trader, you can register a business name if necessary. Your company will need to have separate bank accounts from your own personal banks accounts.
A company is a separate legal entity, which can sue and be sued in its own name. The shareholders of a company are the ‘owners’, who appoint the directors to manage the company. The directors are accountable to the shareholders. If you operate a company, whilst you will be a director of the company and conduct business with other entities, it will be your company that is contracting with the other party and not you personally. The liability of the company is separate from your own, so in effect your personal liability extends only to the amount of money that you personally invested into the company. The idea is that a company protects you from personal liability and thus will ensure that your personal assets such as your house and motor vehicles would not be at risk if the business failed and the company was wound up. This is referred to as the ‘corporate veil’. The corporate veil is not impenetrable and can be lifted in circumstances where you have breached your duties as a director under the Corporations Act 2001 (Cth).
Further, you will probably find that anyone providing credit to the company (such as a bank) will seek a director’s guarantee, meaning that you will be personally liable to pay if the company does not pay. For example, if you are leasing premises in the name of the company, the landlord will seek a director’s guarantee to ensure that the obligations of the company under lease are met. Director’s guarantees are also commonly sought for any equipment leases and trade suppliers.
As a separate legal entity, a company will need to have a separate tax return. As for operating as a sole trader, you may consider engaging the services of a professional to assist with preparing the returns for the company. You will still prepare your own personal tax return, as you will be deemed an employee of the company and receive an income. This may not be simple, as you may have further streams of income from the company such as the repayments of loans for money you initially invested into the company.
1) Separate legal entity.
2) You are not personally liable for debts and/or losses.
3) Personal assets are protected as a result of the “corporate veil”.
4) Business can be expanded.
1) Higher set-up costs and ongoing costs.
2) Limited control (i.e. directors, management).
3) Increased level of complexity.
4) Limited tax concessions.
A trust is an arrangement whereby the business is run, and assets are held, by the trustee for the benefit of the beneficiaries. The trustee may be an individual or a company, and will be the legal owner of the assets of the business. In the case of an individual going into business on their own, they would likely run the business for the benefit of themselves and their family members.
The operation of a trust is similar to that of a company in that separate accounts and accounting must be undertaken.
To maximise asset protection, an individual may establish a company to act as trustee, as this would enliven a corporate veil and offer asset protection should the business fail. However, the individual would still need to abide by the director’s duties as with any company.
The establishment of a trust can be more expensive than either of the other methods of operating a business. This is because a trust deed must be carefully drafted and executed by the parties, which will be in addition to any other setup costs. It is best to speak with both your accountant and a solicitor to consider if a trust is the right method of operating your business.
1) May provide increased privacy compared to a company module.
2) Limited liability.
3) Ease of income distribution.
1) Increased set-up costs.
2) May pose difficulties when trying to attract investors.
3) individual trustee can be held personally liable for trust debts and losses.
Registration of business name
If you are trading in your own name or the company name, you may elect not to register a business name. In the case of an individual, you cannot be barred from trading in your own name. In the case of a company, once your company name is registered, another person cannot register a business name which is the same as your company name. However, if you wish to trade under any other name other than your own name, or that of the company, you will need to register a business name.
Business names can be registered for one or three years. Registration of your business name does not provide ownership of the name, nor does it provide any protection for name. Another person could register a similar name. However, you may register your business name as a trademark to protect it as your intellectual property.
Please see our next installment in our business series, Going into Business, in which we will cover establishment of businesses by more than one person (partnerships). Should you have any questions, please contact our office to arrange a no obligation fee interview to discuss your business requirements.