Many of us dream of being our own boss and joining the ranks of the self-employed. If you’re one of them, then the business case for striking out on your own is now more attractive than ever. Business registration has been streamlined and tax cuts for small business have been introduced.
Beginning this financial year, the company tax rate has been cut by 1.5 per cent to 28.5 per cent for small businesses with a turnover of less than $2 million a year.
Sole traders haven’t been left out, with unincorporated small businesses receiving a 5 per cent discount on their tax up to a maximum of $1000 a year.i
What’s more, as announced in the May 2015 budget, small businesses can immediately write down eligible assets as long as each asset is valued below $20,000.
Before you get down to business, you need to choose a legal structure. The three structures most commonly used by small business are sole traders, partnerships and incorporated companies. Each has its pros and cons, depending on the type of business and your vision for the future.
Sole traders are the simplest business structure. All income from your business is treated as personal income so your marginal tax rate will apply. There’s no need for workers compensation or superannuation payments and decisions about the business rest entirely with you.
As a sole trader the set-up costs are also low. Applying for an Australian Business Number (ABN) is free and if you choose to operate with a business name then this will cost just $34 for one year or $79 for three.ii
But there is a downside. It’s harder to borrow money for the business so you could end up providing your family home or other personal assets as collateral. Should the business fail, these assets could come under threat.
If you plan to run your business with one or more other people, then a partnership may be the answer. A partnership can have anything from two to 20 partners. To get started it will need an ABN, a tax file number (TFN) and GST registration.
While the income of the business is received jointly, each partner pays their own tax.
When it comes to debt, each partner is liable. One of the benefits of a partnership is that it’s easier to raise funds as you are sharing the risk.
Of course partnerships can run into troubles, particularly if there is a disagreement. So it’s wise to have the terms of the partnership spelled out in writing, with a good exit plan and insurance in place to cover you if one of the partners is no longer being able to work in the business.
A partnership also has unlimited liability so it’s possible for one partner to create a liability for which all partners will be liable.
With a company structure, shareholders own the company and directors run the company.
Establishment and ongoing costs are generally higher than other structures. A company needs an Australian Company Number (ACN) assigned by the Australian Securities and Investments Commission plus there is an ASIC annual review fee.
But there are advantages; liability is limited and it’s easier to raise capital. Liability is limited to the unpaid capital of shares owned so if the shares are fully owned then shareholders have no liability. This means that debt can’t be recovered from individuals, only from the company.
As a company, you can seek extra funds either by taking out a loan or offering further shares in the business.
Tax on company earnings is also generally lower than individual tax rates, at just 28.5 per cent for small businesses and 30 per cent for larger companies.
Setting up a business requires careful thought and planning.
If you would like to discuss the most appropriate structure for your new venture, then give us a call.