9 essentials for starting your own business
So you’re looking at getting out of the rat race and starting a small business. Good for you. Small businesses make up 96% of all businesses, employ over 40% of us and are the backbone of Australia's economy. Our nation's prosperity depends on entrepreneurs like you.
Given the importance of small business to our economy, you might think the government would make it easy to get your business up and running in order to start contributing to the economy. But it can be more complicated than you would think! There are layers of bureaucratic red tape starting with ABN, TFN, GST, PAYG, FBT and a lot more to tangle you up and slow you down. You really don’t want to get any of this stuff wrong so unless you’re already an expert in tax, law and managing risk, make sure you do plenty of homework and get good advisers.
Your advisers can provide clear and concise details that relate directly to your circumstances, but here are 9 essentials you should make sure you cover off with them as you start to form your business.
Business or hobby?
If you are making some money on the side from an activity you pursue for pleasure or recreation then you may be engaged in a hobby rather than a business. Even if you supply goods and services to businesses you may still be engaged in a hobby and will not have the tax or reporting obligations involved in running a business. A business, on the other hand, is run with the intention of making a profit. There are also minimum levels of income your business must achieve before the ATO will consider it a business instead of a hobby and hence allow you to claim expenses as a tax deduction.
Registration and licensing
As a minimum you will need an Australian Business Number (ABN), Tax File Number (TFN) and business name in order to start a business. You will need to register for GST if your turnover is $75,000 or more and PAYG withholding if you have employees. If you intend to create a brand using any unique branding such as words, logo or pictures you will need to apply for trademarks if you wish to protect your brand identity and ensure no-one else can use these items without your permission. Also make sure you secure your desired web address by registering a domain name. Check with the Australian Business License and Information Service (ABLIS) for licensing requirements that may apply depending on your business type and location – you will need to have your business registered before you can apply for a .com.au domain.
Choosing a business structure
Before you get too far down the road in setting up your business, to make sure you set it up in the right way, you will need to choose the structure of your business. You can run your business as a sole trader, partnership, trust or company. Each has different consequences in terms of taxation, legal liability and ease of setting up. One of the advantages of using a company to run your small business is that earnings are taxed at a flat rate of 28.5%. A company is a separate legal entity so you also benefit from limited liability, so your personal assets may be protected from creditors. Alternatively, a sole trader business is simple to set up and operate. As a sole trader you pay tax at your marginal income tax rate but may benefit from the tax-free threshold which is currently $18,200. On the other hand there is no division between your personal and business assets so you are personally liable for all aspects of the business. Trusts are slightly more complicated to set up but afford you the flexibility of making tax efficient distributions to adult family members.
Protecting your Intellectual Property
Make sure you register your own trademarks, patents and designs and protect your copyright so others can’t steal your ideas and profits. Also be careful not to infringe other’s intellectual property rights, otherwise you can get sued and be forced to pay damages.
Complying with laws and regulations
Above all else ensure you keep proper accounting records and pay your tax. Be aware of the prohibitions on misleading and deceptive conduct and on false and misleading representations in advertising. If you are selling products there are also certain statutory warranty and refund regimes as well as rules and standards regarding product safety which you must observe. In dealing with distributors of your products you will also want to be aware of prohibitions on exclusive dealing, third line forcing and price fixing.
There is no shortage of laws telling you what you can and can’t do when it comes to hiring staff in your business. You need to be aware of minimum pay and conditions under the Fair Work Act. Will you be hiring employees or contactors, apprentices or overseas workers? Make sure that any contracting arrangements you enter into are legal and fully documented. Having employees means you need to make PAYG and superannuation contributions on their behalf, you may also be offering your employees benefits to which FBT applies. Know about the work health and safety, equal opportunity, employment and anti-discrimination laws and what constitutes unfair dismissal.
Doing business online
Most businesses have an online presence and many conduct much of their business activity online. If you are holding personal information of your customers you will need to understand your obligations under privacy laws. IT security is also essential to protect your customers’ information as well as your own. If you communicate with customers electronically you must be aware of the anti-spam laws.
Protecting your business
Depending on your business type there are a variety of insurances you will need depending on your location, some of these will be compulsory. If you hire staff you need workers’ compensation. If you are running a home based business you will need to check to what extent your existing building and contents policy provides cover for or has any exclusion which might apply to your business activities. Assets and revenue insurance can protect any business equipment or machinery as well as the revenue you generate from your business activities. Professional indemnity, public and product liability insurances will help you in the unfortunate event that your business is held responsible for causing loss or injury to the person or property of another. Make sure you get the right insurances to protect your business and consult an insurance adviser.
Federal Government websites like the ATO, Treasury, and business.gov.au contain a great deal of useful information on what’s involved in starting and running a business. State Governments also provide useful resources such as business.qld.gov.au/business/starting. Doing your own research and planning is a great start but depending on the complexity of your business you will also need good advisers. Ideally find an accountant, lawyer and insurance adviser you can trust to keep your business on the right side of the law and protected from the various legal and non-legal risks which can threaten your earning capacity.
Navigating the minefield that is starting your own business can become overwhelming, but don’t be discouraged, most problems can be avoided by taking time to research and carefully plan your business and by getting good advice. Remember the famous words by Benjamin Franklin: “If you fail to plan, you are planning to fail”.
Disclaimer: This is general information only and nothing in this article constitutes legal or financial product advice.
ATO – Australian Tax Office
GST – Goods & Services Tax
FBT – Fringe Benefits Tax
TFN – Tax File Number
PAYG – Pay As You Go (tax)
ABN – Australian Business Number
For more details on the meanings of these terms, please visit www.ato.gov.au