There are a few things you'll need to submit before you can start operating your business. You'll find these are very simple when your business is developed as a partnership or sole tradership. They become a bit more complex when dealing with other business structures. We've front loaded JustStartUp with the required paperwork for two reasons:
- It can take quite a while for your information to be processed by the Australian government.
- Once your information is processed, there's nothing stopping you from starting work (i.e. no excuses).
The Australian Government has a great resource to help you stay on top of the paperwork (which you might not even know you need). It's recommended that you explore this resource in addition to reading JustStartUp.
Note: JustStartUp is provided as an informative guide, and isn't a substitute for sound legal, accounting, tax, or other professional advice. See our Legal Disclaimer before you get going.
Getting a Tax File Number (TFN)
Your tax file number (TFN) is your personal reference number in the Australian tax and superannuation systems. To apply for an Australian business number (see below) you will need a TFN. Your TFN is a part of your paper trail and identity - keep it safe.
Application for a TFN will depend on your circumstances but will generally be acquired online. Everything you need to know can be found on the ATO website. The process usually involves applying online, followed by a brief interview at an Australia Post outlet with your identity documents.
You may already have a TFN. If so, you need not apply again - your TFN should remain the same for life.
Three Types of Business Structures
There are three popular business structures under the Australian tax system. Your business may be a sole trader, a partnership or a proprietary limited company (Pty Ltd). The first two structures are relatively simple:
- You trade on your own and control and manage the business.
- You are legally responsible for all aspects of the business.
- Debts and losses can't be shared with other individuals.
- You pay tax at the same income tax rates as for individual taxpayers.
- You have your own ABN that is associated with your TFN.
- You have unlimited liability for debts (i.e. business debt will be reclaimed through your personal assets).
Partnership ("General Partnership")
- Made up of between 2 and 20 "partners" who are defined in a Partnership Agreement.
- Income, loss and control of the business is shared amongst the partners.
- The partnership doesn't pay income tax on the profit it earns - each partner pays tax on the share of profit they receive.
- The partnership has its own TFN (which you can apply for concurrently with an ABN application).
- The partnership has unlimited liability for debts (i.e. business debt will be reclaimed through the personal assets of the partners).
The above tax structures are simple because neither business structure pays tax on its income. Rather, the individual or partners add their share of the income (or loss) from the business to their personal tax return. You can think of this as simply listing the income (or loss) from your business as a separate source of income on your personal tax return, as if it were a normal job.
Proprietary limited companies are a little more complex, as they exist as a separate legal entity to yourself and your business partners (if any).
Proprietary Limited Company (Pty Ltd)
- A company has a separate legal existence, distinct from its owners, managers, operators etc.
- Effectively, a company has the powers of an individual. It has its own tax liability, it can own property, can sue and be sued etc.
- Companies are limited by shares, with up to 50 non-employee shareholders. There must be at least one shareholder.
- A company's shareholders are liable only up to the value of their shares (note this is for proprietary companies limited by shares - there are other types which we don't discuss here).
- A company must have at least one director who lives in Australia, as well as a Secretary (who can be the same person).
- Companies have certain financial reporting requirements (e.g. creation of standard accounting documents each year).
The real benefit of being a proprietary limited company is that if everything goes wrong and your company has a debt of $10 million, you only stand to lose as much as your shares are worth (creditors can't come after your personal assets). There are exceptions to this; for example, if you are proven to have taken on a debt while your company is insolvent. You can read more about what a proprietary limited company entails on the ASIC website.
Which Structure Is Right?
If you're providing products or advice that have the potential to cause serious financial harm, it would make sense to be a proprietary limited company to limit your liability if things go wrong (for example, if you are sued). On the other hand, sole traderships and partnerships are a simple addition to your existing personal tax return if you do not expect to be liable for any mistake that has major financial consequences.
This Schweizer article provides a good overview of the nuances of business structures in Australia. You can also learn more about business structures from the Australian government's business website.
Contact a family accountant to get advice on which arrangements are best suited to your personal circumstances.
Getting an Australian Business Number (ABN)/Australian Company Number (ACN)
A family accountant can help you register for a sole trader or partnership ABN, and fees are usually reasonable for these applications. Alternatively, it is free to register a sole trader or a partnership ABN with the Australian Securities and Investment Commission (ASIC) directly.
If you are registering a proprietary limited company you must apply for an ACN first. There is a mandatory ASIC registration fee of $479 (as at May 2018) for an ACN, in addition to any accounting fees. While you can lodge an application directly with ASIC (see the link below), it is wise to discuss the particulars with an accountant first. Once you receive an ACN, you can then register an ABN if necessary.
If you're starting a partnership you'll need to formulate a Partnership Agreement. This document sets out the rules for splitting income (or loss), as well as a variety of other rules and commandments that the partners must abide by. A sample is provided below (which is not intended for use or replication).
Do not underestimate the importance of a sound Partnership Agreement. Seek appropriate legal and accounting advice when preparing your Partnership Agreement.
Proprietary Limited Company Documents
A proprietary limited company can have either "replaceable rules" or a "constitution". You should seek advice from a professional if preparing either of these documents. A sample proprietary limited company constitution is available below (created by ClearDocs).
ASIC Business Name Registration
You may have seen businesses operating under a business name. For example, Bill's Home & Maintenance may actually be a sole tradership, legally named Bill Samuel Smith. However, this sole trader has registered a business name with the Australian Securities and Investments Commission (ASIC). As such, Bill can now use his trading name on marketing materials. On his invoices he may write Bill's Home & Maintenance (Bill. S. Smith TA). Note that "TA" stands for "trading as".
Getting a trading name is as simple as purchasing a registration on the ASIC website. This business name must conform with a number of rules (and cannot be taken by another business). Note that registering your ASIC name does not give you trademark or copyright protection over that name! You must have an ABN for your partnership or sole tradership to register a business name, or an ACN for a proprietary limited company.
This registration fee is $35 for one year of registration, or $82 for three years of registration (current as at May 2018).
Registering for Goods & Services Tax (GST)
GST is a broad-based tax of 10% on most goods, services and other items sold in Australia. You must apply for GST registration if your business has (or is expected to have) a revenue of $75,000 or more per year. If you provide taxi travel for passengers in exchange for a fare as part of your business, you must register for GST regardless of your revenue.
You can read more about GST on the Australian government's business website.
Getting a Bank Account
Once you have all of the above, you'll be able to set up a business bank account. Remember, you'll need appropriate identification, your TFN, ABN and/or ACN, Partnership Agreement (if applicable) or Replaceable Rules/Constitution (if applicable), as well as other miscellaneous materials depending on the bank. Unfortunately, business bank accounts are typically not free.
You'll find the links to a number of relevant products below. Choosing a bank account is usually a decision made based on preference or circumstance. Note that transferring money to partners in a partnership may be easier if all partners are with the same bank.
If you're operating as a sole trader, you may not need to get a business bank account. You may be able to use your existing personal account for your business dealings - this is a personal decision.
Financial Record Keeping
It's very (very, very) important to keep track of what goes in, and what comes out, of your business bank account. This ensures you remain solvent (i.e. have cash to operate) and helps you track how well you're doing. Obviously, the best way to make a decent profit is to operate with minimal expense.
To help you get started, you'll find a spreadsheet to help estimate your startup costs below. This spreadsheet is a variation of that provided by the Australian government's business website.
You'll also want to keep track of your income and expenses. It's worth keeping every receipt and claiming all relevant expenses as tax deductions, to reduce your taxable income. Below is a link to a generic financial spreadsheet which may help.
There are more sophisticated metrics for assessing your business' performance including a variety of ratios. If you'd like to know more, visit the Australian government's business website.
If you employ others you'll need to keep on top of a few things, such as
- Pay as you go (PAYG) tax.
- Superannuation disbursements.
- Travel and other costs.
Read the Australian government's business website to understand your obligations when employing others.
There will always, undoubtedly be other stuff you need to consider. This usually includes insurance and things that limit your exposure to being sued. While JustStartUp doesn't have all the answers for the other stuff, there is at least one piece of insurance you should have; public liability insurance.
Public liability insurance protects against claims of personal injury or property damage that someone suffers (or claims to have suffered) as a result of your business activities. For example, you hold a concert and somebody trips on a cable and injures themselves. Public liability insurance would help you here.
If you contract to (i.e. do a job for) another business, they will usually ask for your public liability "Certificate of Currency", which is issued once you are insured. You can learn more by visiting the links below for two common insurers.
There are plenty of other types of insurance (e.g. employee liability, property) that may be required for your business. It's important to talk to those in the industry and find out what you should be covered for. You may also want professional indemnity insurance which covers you if you give bad advice or service to somebody. For example, dentists have professional indemnity insurance if they injure a patient and are sued.
Superannuation is something you'll have to consider irrespective of your business structure (except if you are a sole trader). You should always think about paying yourself superannuation if you are in a partnership or sole tradership. You can learn more about superannuation at the Australian government's business website.
Now the paperwork is under control. We'll cover your business purpose and values in the next chapter.