We understand setting up your own private business may be exciting for you. But if you don’t have any preparation, it can also be more challenging. In short, this guide will take you through each step of starting a business and help you understand what’s ahead. Basically, below options of business structure could be available to proceed with based on your individual circumstances:
1. SOLE TRADER (TRADING UNDER ABN)
A sole trader is an individual running a business. It is the simplest and cheapest business structure. If you operate your own private business as a sole trader, you are the only owner, and you control and manage the entire business affairs yourself. You are solely and legally responsible for all aspects of the business. Debts and losses can’t be shared with other. You can employ workers in your business, but you can’t employ yourself. As a sole trader, you are responsible for paying your workers’ superannuation liability. You’re also responsible for your own super and may choose to pay it into a fund for yourself to help save for your retirement.
A partnership is a group or association of people who carry on a business and distribute income or losses between the partners. For example, if you and a friend or family member decide to set up a business together, you might operate it as a partnership. A partnership is relatively inexpensive to set up and operate. The partners share income, losses, and control of the business. A written partnership agreement is not essential for a partnership to exist but is a good idea. A partnership agreement should outline how income or losses will be distributed to the partners and know how the business will be controlled.
A partnership agreement can help prevent misunderstandings and disputes about what each partner brings to the partnership. And what they are entitled to receive from the income of the business. This is particularly important for tax purposes if the profit or losses are not distributed equally among partners. Then the partners in a partnership are not employees, but the partnership might also employ other workers. Partners are responsible for their own superannuation arrangements. However, the partnership is required to pay superannuation for its employees. As a partner you can’t claim deductions for money drawn from the business. The amounts you take from a partnership are not wages for tax purposes.
A company is a legal entity with higher set-up and administration costs; run by its directors and owned by its shareholders. Companies also have additional reporting requirements. While a company provides some asset protection, its directors can be legally liable for their actions. And in some cases, for the debts of the company. Companies are regulated by the Australian Securities & Investments Commission (ASIC).
The company must apply for a tax file number (TFN), is entitled to an Australian business number (ABN) if it is registered under the Corporations Act 2001. A company not registered under the Corporations law may register for an ABN, if it is carrying on an enterprise in Australia. The company must be registered for GST if its annual GST turnover is $75,000 or more (there are certain exceptions to this rule where GST registration may be required below this threshold as well). The Company owns the money that the business earns. The individuals who control the business cannot take money out of the business, except as a formal distribution of the profits or wages. The company must lodge an annual company tax return and usually pays its income tax by instalments through the pay as you go (PAYG) instalments system. Sometimes, the company may be eligible for small business concessions.
Setting up a trust can be expensive as a formal deed is required outlining how the trust will operate. There are formal yearly administrative tasks for the trustee. A trustee is legally responsible for the operation of the trust. The trustee can be an individual or a company. Hence, profits from trust go to beneficiaries.
The trust must have its own tax file number (TFN) for lodging its annual tax return. It should apply for an ABN and use it for all business dealings. It must be registered for GST, if annual GST turnover is $75,000 or more. It may be liable to pay tax depending on the wording of its deed. And whether any income the trust earns is distributed to its beneficiaries. It may be able to access small business tax concessions. It must pay super for any of its employees (this may also include the trustee if they are also the employees of the trust).