How do I Start a Business? Refining your business idea is such an enjoyable part of starting a business, however once you get to the nitty gritty, it is easy to start feeling overwhelmed.
Choosing a Business Structure
A lot of new business owners tell us they want to run their business using a Company.
Other people they know use a Company or they think a Company is just what you use when you run a business.
As we talk to them about all of their options, at least half decide to go with a different structure that better meets their personal needs.
Starting a business as a Sole Trader is the simplest and most straight forward option for a new business.
Being a Sole Trader means you run the business in your own personal name. There is no fancy setup required – just some business registrations.
You will need:
- An ABN
You can apply for an ABN (Australian Business Number) through the Australian Business Register website.
You may need:
- GST registration – if you expect to have $75k or more of income come into your business during the year (this amount gets pro-rated if your business is only operating for a part of the year) you will need to register for GST.
- PAYG Withholding registration – if you are going to have employees you will need to register for PAYG Withholding.
If you would like a business name on your invoices instead of your personal name, you can register a business name with the Australian Business Register.
A sole trader is the most straight forward and cheapest option for you.
You can change your business structure to suit your changing needs as your business grows.
Once the income of your business is more than $20k for a financial year (or pro-rated if your business is new) – if you have more business expenses than business income, you will be able to use this business loss to reduce the tax you are paying on any other income you have.
The big one is that if anyone sues your business, they are suing you personally.
If you are making a large amount of profit, this is taxable to you at your marginal income tax rates.
A partnership can be made up of any number of people – or business entities.
You create a partnership by registering with the Australian Business Register for an ABN and Tax File Number.
A partnership needs to lodge a tax return each year to let the ATO know how much the profit or loss of the business was in that year.
When you create the partnership, the ABR (Australian Business Register) will decide the name of your partnership based on the people, or other entities that make up the partnership. These names are very functional, but not very pretty!
You will probably want to register a business trading name with the ABR.
You may need:
- GST registration – if you expect to have $75k or more of income come into the business during the year (this amount gets pro-rated if your business is only operating for a part of the year) you will need to register for GST.
- PAYG Withholding registration – if the partnership is going to have employees you will need to register for PAYG Withholding.
It is wise to always have a partnership agreement in place before you start your business – and before you start spending any money on the business.
This agreement will help you and your business partners to talk about all of the things that could happen – and plan ways you can deal with these situations before they arise.
Partnerships are very cheap to set up.
If the partnership is running at a loss, and the income going through the business is more than $20k for a full financial year, you will be able to claim your share of the losses in your individual tax return. This can be very helpful – especially when your business is still new.
Partnerships can be a very cost effective option for spouses to take advantage of.
It is very important that you only enter into a Partnership with people that you trust.
If one of your business partners incurs a debt on behalf of the partnership – you can be held personally responsible for this debt.
Any profits that the partnership makes gets split between the partners and you will pay tax on these amounts at your individual income tax rates.
A company is a whole separate legal entity from yourself. It is like an entirely different person.
To set up a company is expensive when compared to setting yourself up as a sole trader or setting up a partnership.
When you have a company, you run your business in the company name, and this is the name that goes on your bank accounts and invoices.
A company will have it’s own ABN and Tax File Number.
You will need to lodge a tax return each year, and it would be highly recommended that you have your accountant prepare financial statements for the company each year.
You may need:
- GST registration – if you think the Company will have $75k or more income come into the business during the year (this amount gets pro-rated if your business is only operating for a part of the year) you will need to register for GST.
- PAYG Withholding registration – if the Company employs staff – including yourself – you will need to register for PAYG Withholding.
If something goes wrong, and you are sued, your financial liability is limited to the amount that you initially invested in the company. This can be as low as $2.
It is important to note that the new Director rules mean that if the company does not pay wages or superannuation to your employees or pay the withholding tax on wages to the ATO, that the ATO can require the Directors of the company to pay these amounts out of their own pockets.
A company is a more expensive setup. It will cost you around $1,000 – which includes your accountants time, the legal fees for the Company Constitution and the ASIC fee you need to pay when you set up a Company.
On top of your ordinary tax return lodgement and financial statement preparation fees, you will also need to pay an annual ASIC fee. This is currently $249 (2017) but is indexed every year.
Another possible disadvantage to using a Company for a new business is that if the business makes a loss, the loss is stuck in the company until the business starts making a profit.
Unlike a Sole Trader or Partnership structure – in a Company you may be paying wages to yourself. You need to pay Superannuation on all wages that you pay to yourself from the Company. This is a very important thing to note, as it catches many new and small businesses by surprise, and can cause cashflow difficulties when money is tight.
Registering for GST
If you are registered for GST you will need to add 10% to your prices – and each quarter or month give this amount to the ATO.
Being registered for GST means you get to calculate how much the business has spent on GST for things it has purchased and get this amount back from the ATO.
If you do not have more than $75k going through your business – you can still choose to register for GST.
Registering for PAYG Withholding
- This lets the ATO know that you are paying wages to your employees. They will ask you either each quarter or each month – depending on the amount of wages you expect to be paying – how much you have paid to employees during the period, and how much tax you have withheld from their wages.
The ATO will ask you to pay to them the amount of tax you have withheld each period.
You will also need to lodge PAYG Payment Summaries in July or August for anyone you have paid wages to during the financial year.
We recommend talking to an accountant who can walk you through your personal circumstances to help you understand what the best structure is for you and your business.
Sumo Accounting is focused on new and small businesses – so if you do not currently have a relationship with an accountant, or would like a fresh set of eyes to give you a hand, we are always happy to help.