Found a gap in the market for a new product or service? Got a great idea for a business venture? The following guide provides some useful pointers for completing the paperwork to launch a new business.
There are several high-level issues to consider when launching a business. Choice of legal structure is often a balance between long-term requirements for growth and protection and short-term issues such as set-up costs and ease of compliance. Perhaps the most important requirement for a legal structure is flexibility.
There are several issues to consider when choosing a legal structure, including best-fit to the business type, set-up costs, the number and type of investors and ongoing compliance costs.
Other issues to consider include the rules for superannuation contributions, salary packaging and how the profit will be distributed. Also consider whether the business could outgrow its legal structure and how easy or costly it would be to change to a new format in the future, for example switching from a partnership to a company.
Sole Trader. Operating as a sole trader gives business owners greater control over their enterprise than other business structures, including the flexibility to undertake new ventures. This structure has the lowest establishment costs but the owner’s personal assets may be at risk should the business fail.
Partnership. When going into partnership it is essential to draw up a partnership agreement, even for a family business. This provides the ground rules for the management of the business and an agreed process to follow for any future changes. Profit will flow to the partners each year according to their percentage share of the partnership.
Taxation rates should be carefully considered when opting for a business partnership over a company. Individuals in top income brackets will pay a 48.5 percent rate, whereas the company tax rate is currently 30 percent. Like sole traders, partners also face unlimited liability, including liability for the actions of other partners.
Trusts. Trusts may be used when a business owner wants flexibility in distributing income and capital and are often used by family businesses for this reason. Trusts must distribute their taxable income to their beneficiaries each year.
Proprietary company. Companies have limited liability, which may provide a greater degree of protection for directors and investors. Companies can also reinvest after-tax profits in the business rather than having to distribute all profits each year.
However, when establishing a small company carefully consider personal services income rules as these may mean that company profits are taxed as though they were personal income. In addition, companies cannot gain exemption from capital gains tax rates that may be may be available to sole traders, partners and trust beneficiaries.
Proprietary companies may face heavier reporting regimes than other legal structures, including auditing requirements, but may be able to reduce their filing requirements if they are considered ‘small’ under the Corporations Law. Companies can be classified as small if they meet two of the three following criteria:
- Consolidated gross operating revenue is less than $10 million each year
- Consolidated gross assets are less than $5 million in the financial year
- Number of employees at year end is less than 50.
Completing the paperwork
All businesses must ensure they seek the appropriate registrations with the Australian Taxation Office or the relevant state registration office for the following:
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Tax file number (TFN)
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Australian business number (ABN)
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Pay as you go (PAYG) – withholdings for employee taxes
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Notification of the company’s public officer
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Fringe benefits tax (FBT).
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Goods and services tax (GST)
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Payroll tax – if your wages exceed the threshold in each state or territory where staff are employed
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If a sole trader or a partnership wants to operate with a business name, they may need to register that name in the states in which they seek to operate.
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To start a new company, a new entity can either be created from scratch by filling in the relevant paperwork, or shelf companies can be acquired relatively cheaply from lawyers, accountants and other business advisers. Once the company has been registered under the Corporations Act it is automatically registered throughout Australia and can conduct business without needing to register in individual states or territories.
To register a company, the Australian Securities & Investment Commission will require details of: proposed company name, registered office, director and secretary, members’ shareholder, class and type of company, principal business office and share structure.
New businesses must also consider the following additional regulatory requirements: workers compensation insurance in each state in which they employ staff, trademarks, appointing a tax agent, government licences (such as emissions permits) and employee superannuation rules.
Keep the paperwork flowing
Fulfilling regulatory requirements is an ongoing process once the business is up and running, so budget for ongoing compliance costs. Tax compliance requirements include quarterly business activity statements, scheduled payments for GST, FBT and PAYG. There are annual insurance premiums to be paid for workers’ compensation insurance, professional indemnity and other policies.
Companies that import goods may need to pay a customs duty and GST at point of importation.
Whether you’re starting a business alone or with other investors, the venture is not only about jumping through legal hoops, but managing the change in your lifestyle. Keep your personal goals in plain sight as you run through the options.
Clever Companies do not stand still. They are dynamic and constantly challenge the status quo. PwC’s Private Client service team is committed to helping these private businesses make the most of their opportunities. To learn more about the topic covered in this article, please visit www.clevercompanies.com.au or call Chris Burt: 1300 737 938.
