Starting your own business?

The wonderful Chinese proverb “The best time to plant a tree was 20 years ago; the second best time is now” resonates on many levels of life and is highly relevant to those considering starting their own business.

Historically, the months leading into a new financial year signal a burst of entrepreneurial activity. People who have been procrastinating about starting a business take the plunge. It is a time of high excitement interspersed with an equal amount of anxiety.

From a business accountant’s position, we welcome the entrepreneurial spirit, without it, creativity and bold discovery go unrealised. We also welcome the conversation. Speaking with a specialist business accountant before you dive in ensures your vision and passion are firmly planted with the most suitable financial structure for your circumstances. Getting your structure right the first time and opening a communication channel with a qualified financial professional means you can get on and make things happen with confidence and guidance.

In this article, we look at the fundamentals and how we can work with you on this fantastic journey.

Typically, a new business has four standard structures to launch from.

The most common is a “Sole Trader”. This structure works for individuals. It is relatively easy to set up without a large financial outlay or expensive ongoing operational costs. What your business earns goes directly to you as personal income, and you have complete control over the business. While it is a common structure, it does come with limited tax planning opportunities, and you are solely responsible for the business debt and any legal issues. Another significant downside is capital raising. A sole trader cannot sell shares in the business and can be seen as “high risk” to traditional lenders, which makes sourcing funds challenging.

The “Partnership”. Within a partnership structure, two or more individuals share the control and responsibility of the business. It is a standard structure that has benefits. Like a sole trader, a partnership structure is relatively easy and inexpensive to establish. The partners declare their share of profit or loss on their personal tax return and if required, pay tax at personal rates. On the flip side, a partnership structure only has scope for limited tax planning, and partners have joint liability. This means each partner is liable for debts or legal issues, regardless of who may have caused them.

“The Company” The company structure is suitable when you know you can scale, will have multiple employees, or want to protect your personal assets, like your house. Establishing a company is more costly and requires greater administrative oversight and higher ongoing costs. The structure must be registered with ASIC and compliant with the Corporations Act. The company must lodge an annual tax return and supply financial statements to the ATO.
Why would you do it? A company offers far more tax planning flexibility, and the tax rate is fixed (lower than personal tax rates for higher income earners). Liability is limited, and it is more attractive to investors and financial lenders. Aside from the financial incentives, a company has more street cred, and other companies like to do business with companies rather than a sole trader or a partnership arrangement.

“The Trust.” A trust is a recommended structure for a family business. Essentially, “The Trust” is a person or a company that runs a business on behalf of the beneficiaries. They are expensive to establish and come with stringent compliance responsibilities, including the distribution of income. A trust offers several advantages if it is suitable and structured correctly. It can limit liability, which is ideal for asset protection, and it can distribute income to the beneficiaries, making tax planning more flexible.

“Speaking with a specialist business accountant before you dive in ensures your vision and passion are firmly planted with the most suitable financial structure.”

Firstly, they will guide you and advise on the most appropriate structure for your circumstances. It is critical to implement the best option, and business accountants are the best people to assess your needs. They’ll help you establish your banking structure and accounts, advise on accounting software, and devise a system to split business and personal finances.

They’ll get you up and registered, ABN, GST, and PAYG withholding, and step you through the implications and machinations of BAS.

“Building success can be a lonely and thankless existence… knowing you’re not alone on the journey is peace of mind right when you need it.”

A lesser known function is the business accountant’s role as a guiding hand and sounding board. At North Advisory, we are as much about advisory as we are about balancing the books. Our principle business accountant Marius Fourie, has been piloting new business owners for over 15 years, ensuring they dodge the pitfalls of overestimating revenue and underestimating expenses. When to finance, acquire, and take a defensive position, his hands on style and approachable demeanour enable his clients to put one foot in front of the other, knowing they have a handrail when needed.

Building success can be a lonely and thankless existence. While it is your dedication that will ultimately win the day, knowing you are not alone on the journey is peace of mind right when you need it.