You have a great idea for starting a business. Maybe you want to start small and grow, or perhaps you’ll stay small and be content. You could have plans to open a boutique agency, have a brilliant idea for a start-up or an app, or be a tradie working for themselves who contracts out for sites across Australia.
But then reality dawns: how do I even go about starting a business? Who do I speak to? What is an “entity type”, and which one suits what I’m trying to do? How do I comply with tax law and legislation?
All these questions can overwhelm even the brightest minds with the best idea. Rest assured, if you’re lost at the first question of what type of entity you want to be, you aren’t alone: no one is expected to know taxation laws and business terms from scratch.
That’s for the experts to know and walk you through. So, let’s take you through that first step: What entity type is your business?
A Company: A company is a separate legal entity that provides limited liability to its shareholders – the shareholders being the owners of the company, whether it’s you and your business partner or multitudes of partners.
If you plan to grow your business and scale with employees, this is the ideal entity for you.
As well as being required to abide by the rules of the Australian Tax Office (ATO), companies are also required to abide by legislation administered by the Australian Securities and Investment Commission (ASIC).
A Sole trader: You’re a contractor for a worksite, one not employed as a full-time worker for the building company? Do you work for yourself and in an environment with a low risk of litigation?
A “sole trader” might be for you. A sole trader is a business that is being run under an individual’s name. It is the cheapest and easiest structure to establish. It is often favoured by small contractors, tradies, home-based businesses, and online businesses.
A Trust: While most commonly used as an investment vehicle, a trust can also be used as a trading vehicle. When structured correctly, a trust can offer limited liability for the trustees of the trust. While a trust has excellent income splitting capability, it is not a suitable vehicle for growing and scaling a business.
In short: a trust is unlikely to be your first business entity. But talk to an accountant when establishing your business. There are benefits to having a Trust within your overall structure that they can advise you on.
Partnership: A partnership is an association of two or more entities who carry on business in common. A partnership is a relatively low cost to establish; however, like a sole trader, the partners are jointly liable for the debts and actions of each of the other partners. Partnerships are commonly used in professional service businesses.
So, you’ve determined your entity type: now what?
Once you have selected your entity type, you will need to ensure you comply with all relevant regulations and understand what registrations apply to your business. While some registrations are mandatory for all businesses, others will be dependent on your operations and circumstances.
Let’s look at the most common registrations.
Tax File Number (TFN): a TFN is an entity’s personal identification number issued by the ATO. If you’re already an Australian tax resident, you likely have a personal TFN which can be used if you’re a sole trader – but any other entity must have its own TFN.
Once you register for a TFN, you are required to lodge an annual income tax return. The standard tax year in Australia runs from 01 July to 30 June.
Australian Business Number (ABN): An ABN is a business identifier unique to a business entity. It simplifies interaction with customers, other businesses, and the government.
Registration is compulsory if your turnover is greater than $75,000. While it is not mandatory to have an ABN if your turnover is less than $75,000, it can be impractical not to, given business to business payment withholding rules (businesses must withhold 47% of the sale from a business with no ABN) and banking requirements. Additionally, you need to consider the public perception of not holding an ABN (customers may question your credibility).
Both an ABN and a TFN are managed by and applied for through the Australian Business Register (ABR).
Business name registration: You are required to register a business name if you conduct business under a name other than your own name or in the case of a company or trust, the name of that entity.
Taxes. Yep, it’s time to get advice.
It is highly recommended that an entity source external assistance on tax guidance and compliance. Tax rates are constantly changing, particularly around State and Federal Budgets when votes are on the line. A lower tax rate can mean the difference between winning and losing an election.
Furthermore, amid this pandemic, we’ve seen countless changes to various tax rates, such as an increase in the tax-free instant asset write-off threshold for equipment purchases. We’ve also seen the rapid availability of Job Keeper, Job Seeker and now disaster payments, all of which need third party verification of a business’ accounts.
Accountant fees, whether it’s a big bill or a stable, fixed monthly fee favoured by small businesses and sole traders, can be claimed as part of a business’ tax claim, so the spend, in the end, is worth it. An accountant can also help you at step one in advising the right entity type for your business and where and how to apply for ABNs, TFNs and more.
Starting a business is daunting for everyone. But a good idea for a business isn’t worth letting slip because of a fear of failure or a lack of knowledge of the first steps. Start the ball rolling, and before you know it, you have turned an idea into an entity.
Julian Hutabarat, CPA, is the General Manager, Australia for Beany, an online-first accounting company dedicated to proactively serving and advising small to medium businesses and sole traders across the country.