Starting My Business

Starting my business

The Business Structure

Law4U | July 12, 2007 - 1:55AM

Types of business

You have to decide on a legal structure when you start your business. The main choices are:

· sole trader (also called a "single proprietor");

· partnership;

· trust; or

· company.

How to decide?

To decide on the best structure, you should think about:

· what sort of business you will establish;

· the expected income;

· the tax structure and how the business income will affect any personal income you have;

· what sort of personal liability you will have or are prepared to have;

· whether the nature of the business is risky and may be attacked by predators;

· whether asset protection will be an issue;

· the value of the business's assets;

· capital gains tax, if the business may be sold at a later date;

· who are the owners of the business and their shared rights and obligations;

· whether you will use your own name for the business or use a trading name.

Ultimately, you need legal and accounting advice about this to make sure you start on the right foot. This can involve complicated issues and may need proper planning.

Preparation

Before you spend all your money, make sure you have:

· taken into account all the potential costs, including any government costs and the fittings;

· a realistic idea of the other financial needs of your business, particularly in the early days when it may have to be subsidised by your own savings or borrowings;

· properly researched the cost of finance;

· an idea of the other costs of running the business, for instance, the cost of utilities and insurance;

· costs of hiring and maintaining the staff;

· enough money to maintain your lifestyle until the business is self-supporting;

· a budget plan and a marketing plan;

· understand any legal obligations that may be relevant to the business, e.g. company or tax reporting requirements;

· checked with the local council that your business can be operated in the location you intend;

· researched whether there are any employer or retail associations who can help before you begin;

· checked whether there are any government grants on offer for the establishment of your business; and

· researched any technological innovations that could help (or harm with competition) your business;

· a coherent business strategy, and an effective strategic plan that anticipates opportunities and problems - and then plan for them.

Choosing a business name

If you don't use your, or your partner's, first name and surname, or initials and surname, you will have to register a business name. If you want to set up your business in more than one State, you need to register your business name separately in each State. If you will be a sole trader, a partnership or a trust, but not a company, then you are required to register your business name in the state or territory in which you will operate (the www.business.gov.au site will take you to the appropriate agency).

The first step is to choose a name. Remember, a business name will not be registered in certain circumstances, for example:

· it is being used by another business;

· it offends public notions of decency, e.g. it is obscene;

· it might be confused with an already existing business etc.

If you want to check that the name you have chosen is not already taken, have look at the Australian Securities and Investments Commission website - which shows all registered Australian names - company names, business names in every State and Territory of Australia. This is called the "National Names Index".

Registering a business name

You can either do this yourself at the Government Department responsible for business names, or there are private businesses which will provide this service for a fee. You must Search IP Australia's trade marks databases at www.ipaustralia.gov.au to check whether your proposed business name is not the same as one already being used as a trade mark.

The normal steps are:

· Fill in the application form with the basic details of the business, e.g. the address of the business, the names and addresses of the owners and the proposed name of the business.

· Pay the fee.

If the name is available it will be registered and you will be sent a certificate.

There are more formal rules for registering a company - we cover these in another fact sheet.

A business plan

This is a good way to look at the potential of your business. Its functions include:

· testing the feasibility of ideas you have for the business;

· having a document to present to prospective financiers (eg a bank) when applying for a loan or other finance. This is usually necessary before the bank will consider offering you a loan;

· setting out the goals and objectives of the business which will be used to measure the performance of the operation;

· assessing the likely profit to cover loan repayments, income tax, wages etc.

Starting a business plan

You must:

· gather the relevant material that will provide information on the product and the market;

· analyse that information;

· design a strategy to market the product, advertising, finances, sales forecast, budgets, suppliers etc;

· collate it into a coherent plan.

Many people develop this plan with their accountant. Alternatively, there is software available which you can use to put a plan together. You may then want to run it past an accountant. Note if you are leasing retail premises, a business plan is now essential - for more information see our Leasing Premises and Equipment fact sheet.

The Sole Trader

Law4U | July 12, 2007 - 1:40AM

What's a sole trader?

This is the most straightforward structure for a business. Basically it means the business decisions are being made by one person. Of course, it doesn't necessarily mean that the business has only one worker. The sole trader can employ others to do any or all of the work in the business.

What are the advantages?

This type of structure is ideal if the business is not complicated, especially if it does not require a great deal of outside capital.

· There isn't much paperwork in establishing this type of structure.

· You may not have to register the business name (see above).

· There are less stringent reporting obligations compared with other structures.

· You may be able to deduct tax losses from personal income.

· You are entitled to profits and the ownership of assets.

· It's relatively straightforward to wind up.

What are the disadvantages?

· You are personally liable for all debts.

· Personal property may be vulnerable for debts and other business liabilities.

· Large sums of capital are less likely to be available to a sole trader, and you may have to rely more on overdrafts and personal savings.

· You may require enormous investments of time without the normal employee recreation leave and other benefits.

· There may be issues of continuity of business in the event of death or illness.

Limiting liability

Talk to an accountant or lawyer about the legal ownership of personal assets or the use of trusts to limit liability. For instance, the family home may not be exposed if it is in the name of your spouse - you must get legal advice before you do this, because there are other consequences, especially if the spouse dies or you divorce. Also, you may not be able to do this if your sole purpose is to avoid a creditor. Get advice.

Tax

A sole trader pays tax in their own right, as part of their personal income tax return at the personal rate of income tax.

Partnerships

Law4U | July 12, 2007 - 1:45AM

What is a partnership?

Partners are joint owners of a business. They have the same goals and are equally responsible for the decisions made on behalf of the business.

Are all partners equal?

Not necessarily. For instance, in many law firms there are senior and junior partners. However, the partners remain equal from a legal point of view. If there is no written agreement, all partners:

· share profits equally;

· cover losses equally; and

· take equal responsibility for the business's activities and trading.

A written agreement allows partners to change these general rules and record them in the agreement.

Partnership agreements

A partnership agreement is usually a good idea, otherwise there is no written record of the duties and responsibilities of partners, which can be very important if there's a dispute later on.

If there is no written agreement, the duties and responsibilities of partners are equal, which may not be what you want.

What does a partnership agreement cover?

It will cover issues like

· the amount of money each partner brings into the partnership;

· how the profits will be divided;

· the different roles and responsibilities of each partner;

· the requirements to provide financial reports;

· the rights of partners to draw on bank accounts;

· how partners can leave the partnership and the consequences of this;

· what happens when the business is sold;

· how disputes are handled;

· the salaries;

· the rights of departing partners to start a similar business etc.

Partner's unlawful acts

What if the partner does something that is outside their authority under the partnership agreement? This depends whether the person who dealt with the partner knew (or should have known) the action was beyond their authority.

But even if this is so, it will sometimes still be possible for the person to claim compensation from the partnership. The lesson is clear: be very careful who you accept into a business partnership.

Tax

Partners must file a Partnership Return with the Tax Office. It includes a profit and loss statement, and the tax is paid individually by partners on the profits as part of their personal income tax.

Dissolving partnerships

Any partner can dissolve the partnership provided they do it in a way required by the partnership agreement. Make sure you see a lawyer about this, because there are often certain legal formalities, particularly in relation to the formal notice that is required.

Trusts

Law4U | July 12, 2007 - 1:50AM

What is a trust?

Trusts are often used in connection with running a small business. A trust is not a separate legal entity in the same way that a company is. In simple terms it is a business structure where a trustee (usually a company) carries out the business on behalf of the members of the trust. A trust is set up through a trust deed.

Types of trust

There is a range of trusts including:

· discretionary trusts - where the trustee has a discretion when distributing funds to the beneficiaries. The most common example is the family trust;

· unit trust - were unit holders have a number of units in the trust. Distribution from the trust is on the basis of the number of units held.

· hybrid trust - this is a combination between a unit trust and a discretionary trust.

The lingo

Appointor - this is the person who has power under the trust deed to remove the trustee and appoint another trustee.

Beneficiaries - these are the people (can include a company) who are entitled to distributions from the trust.

Settlor - this is a person (who is unrelated to the beneficiary or trustee) who provides an amount of money (eg $10) to establish the trust.

Trustee - this is usually a company (it can be a person) which owns the assets of the trust, not in its own right, but as trustee of the trust. The trustee is responsible for the financial "health" of the trust and makes decisions about distributing income, borrowing money etc

The pros and cons

Advantages of a trust include:

· there may be taxation advantages - although this depends on current tax laws;

· allows for income streaming;

· limited liability etc.

· it can provide asset protection advantages.

The disadvantages of a trust include:

· possible implication for capital gains tax;

· distribution of tax losses;

· establishment costs (although these days this can be minimal by using a pro forma trust deed, but get professional advice first) and administration costs etc.

What is a company?

Law4U | July 12, 2007 - 1:50AM

What is a company?

In many ways a company is similar to a sole trader or partnership, except that it exists as a separate legal entity from the owners (who are called shareholders). This means that in most circumstances, personal assets of the owners cannot be touched to pay for the debts of the company.

What law applies?

On 15 July 2001, the Corporations Law was replaced by the Corporations Act 2001. It is similar to the law it replaced, the Corporations Law. The Australian Securities Investment Commission administers the Act. Part 1.5 of the Corporations Act contains a "Small Business Guide" to help small business operators understand their rights an obligations.

Regulation of companies

Companies are regulated by the Australian Securities and Investment Commission (ASIC). The ASIC is an independent government body that administers the Corporations Law. Its aims are to provide protection for consumers and businesses in their dealings with companies and to ensure that companies:

· operate according to the law;

· report their activities;