The foundations of your business
So you have decided to jump into business! Congratulations, but before you get to carried away let’s look at the big picture. Our business accountant has put together some key questions you need to address before you commit.
- Is this business actually just a hobby?
- How much money could it make?
- Will the business employ staff?
- Have you got some cash to start up, is that enough?
- Can you fund the ongoing costs?
- What is the profit margin you will be making on each service/product sold?
- How many sales do you need to break even?
- Will you be looking for investors/partners or want to build it to sell in the future?
- Do you have a business accountant?
While these questions may seem a little heavy at this stage, they are vital to knowing what type of business you should setup. You can start out as a sole trader and move to a company later but be aware all your systems will need to change to your new company. This includes changes to the business ABN and bank account. There are many other change over items that need to be address, these include, your bookkeeping system, your invoice, your business cards, directory listings and payment details to name just a few. To save the stress and the costs, you should choose a business structure that works from the get go.
Let’s discuss some of the commonly used business structures.
Sole trader – This business structure is great for a small business starting out, they are common for consultants and trades. Sole trader businesses are relatively easy to setup and quick to get started. The bad news for this structure is that that you and your assets are fully exposed and at risk. If someone starts legal action against your business, you could lose your house or any investments you have in your personal name. in addition, if the business does well you will pay tax potentially at the highest tax rate. Also something to note is this structure is very difficult to sell and bring on partners or investors.
Company – A company structure is the preferred structure to start with if you’re serious about getting into business and making a real go of it. The professional setup cost is generally be less than $2,000 as a once off setup fee and normally includes all ATO registrations and ASIC fees. Your business accountant can assist you here and can integrate the company with other entities like family trust you may already have.
Most importantly, your company now takes on the business risks associated with your customers, suppliers and employees and is well worth this setup fee. Think of it as once off business insurance. The company takes on all the business risk, with the only exception being director related risks which you also need to understand. Therefore, It makes perfect sense to invest a little extra to reduce your personal risks and have access to the flexibility of a company and lower tax rates. Having a company structure also allows for profit distributions to shareholders which can be a huge tax benefit. In addition this structure is much more sellable and likely to attract investors in the future.
Trusts – There are many types of trusts that suit different situations, but the most commonly used trust is the discretionary trust. Trusts are more commonly used for investing however some businesses start in the trust structure, The costs are similar to that of a company however, the business risk lies with the trustee. If the trustee is an individual, their personal assets may be at risk. To mitigate the risks, you can opt for a company to act as the trustee You will have the extra costs of an additional company to setup.
In a discretionary trust, trustees have the ability to distribute profits to beneficiaries and the amounts distributed may change each year, so this makes discretionary trusts very attractive given the flexibility of profit distributions. Trusts however, can be difficult to invest in for out side investors. You should speak to a professional before jumping in here.
Other items you need to consider – Once you decide on a structure and have it registered, you may need to charge GST, collect withhold tax from employees and pay superannuation. There is lots of information to learn in this space and will be different for everyone so it is best to talk to your business accountant to understand what you need to do and when you need to do it.
Now, once you decide on a structure – It’s time to get it off the ground – Talk to your business accountant today