Have a great business idea? That’s just a tiny portion of what you need to consider when starting a business. Running a small business is an exciting and rewarding endeavor, but it also comes with a plethora of decisions to make. One of the most important decisions you’ll have to make is to choose the right business structure for your business. Whether you’re just starting out or you’re looking to switch to a different structure, the options can seem overwhelming.
There are several options to choose from, each with its own set of pros and cons. It’s important to understand the differences and how they will affect your business in terms of liability, taxes, and management. In this blog post, we will guide you through the process of setting up a business structure, and provide you with valuable tips and resources. If you know your legal, accounting and tax requirements from the start, you will set yourself up with the right foundation to run a successful and profitable business.
Choosing the Legal Structure for Your Business
The four commonly used business structures in Australia are Sole Trader, Partnership, Company and Trust. Costs and complexity increase as you move through these structures. Sole trader is usually the simplest business structure, with Trusts being the most complex.
The simplest tax structure, Sole Trader, is inexpensive to set up with the least legal and tax formalities. As a sole trader, the individual is personally responsible for all aspects of the business. This includes making decisions, managing the business and finances, and assuming all liabilities. This can be a significant risk, but it also means that the owner has complete control over the business. The business income is treated as your individual income and you are taxed at your marginal tax rate.
Partnerships are an association of people who carry on a business as partners or receive income jointly. Like the sole trader business structure, a partnership is relatively inexpensive to set up and operate. A partnership is not a separate legal entity and doesn’t pay income tax on the income it earns. Instead, each partner pays tax on their share of the net partnership income they receive. The partnership will have its own Tax File Number will need to lodge a Partnership Tax Return at tax time.
Companies are a more complex business structure with higher set-up and administrative costs. It is also a popular choice for small businesses in Australia. A company is a separate legal entity, unlike a sole trader or partnership. This structure offers personal asset protection for the shareholders. The shareholders are generally not personally liable for the company’s debts. Your only financial obligation is to pay the company any amount unpaid on your shares if you are called on to do so. However, directors of the company may be held personally liable if found to be in breach of their legal obligations. At tax time, companies lodge an annual Company Tax Return. The company will pay tax for the income generated at a company tax rate. It applies from the first dollar of income generated and is lower than the highest individual marginal tax rate.
Trusts are expensive and complicated to set up. They require a formal Trust Deed that outlines how the trust operates and requires the trustee (and individual or company) to undertake formal yearly administrative tasks. Trusts can be difficult to dissolve or change once established. To set up and manage a trust, it is important to see a qualified, licensed professional to help you understand what’s involved.
If you want to know more about other important factors to consider when you choose a business structure, check out our free Business Structure Comparison Infographic.
Open a Business Bank Account
Regardless of the business structure that you choose, you need to have a business bank account. Having a separate bank account allows an easy separation between personal cash and money generated from your business. Most banks don’t allow you to use a general personal bank account for business. Banks offer a variety of business bank accounts, each with different features and varying levels of fees and overdraft levels.
Set up a Bookkeeping and Accounting System
The Australian Taxation Office (ATO) requires businesses to keep adequate records and report earnings. To meet these requirements, it is essential to understand the bookkeeping process and have a reliable accounting system in place. At TJ Accounting Consultants, we recommend using Xero. It is an easy-to-use system that makes the accounting process relatively straightforward.
If record keeping and administrative tasks are not something that you enjoy doing, we highly recommend outsourcing it to a bookkeeper. Working with a bookkeeper can save you a significant amount of time and money, by allowing you to focus on growing your business.
Know Your Taxation Obligations
Tax is an unavoidable part of running a business. It is mandatory for you to register for the relevant business and taxation numbers, such as an Australian Business Number (ABN), Australian Company Number (ACN), or Tax File Number (TFN). Know how and when to register for and pay Goods and Services Tax (GST) and when to report and pay tax. If you have employees, you will also need to know and understand any superannuation obligations, PAYG Withholding tax, HELP debt repayments and income tax payable.
We shared our handy tips on how to get your business records ready for tax time in this blog.
Contact us to talk about choosing a business structure that would best suit your situations and discuss your business compliance and taxation needs.