In this article, we're going to tell you how to start a business in Australia.
Setting up a new business can be an exciting process. It can also be stressful and time consuming if you don't get the right advice. Entrepreneurs and new business owners not only have to focus on the bread-and-butter goods or services, but they also shoulder the responsibility of those extra business requirements. Tasks like marketing, accounting, operations and management suddenly become part of a new business owner's job.
Moreover, the laws, regulations and requirements of starting a new business vary from country to country. That is why, to help people set up a successful business in Australia, we have come up with this comprehensive legal guide. We will take you through the various steps of starting a business in Australia.
This article will help new businesses to understand how they can go about setting up, structuring and running a successful business.
Author: Farrah Motley is a highly experienced business lawyer, with nearly a decade of experience providing legal advice to Australian businesses.
Step 1: Consider Whether You Are Ready To Start a Business
When you eventually decide to start a business, you are required to put in a lot of effort and commitment to make it work. That is why before diving in head first, you must look at the benefits and risks of setting up a business and consider if you are passionate about starting a business and everything that comes with self-employment. It is very important that you take some time and critically evaluate your goals and the challenges that come with owning a business.
The challenges of starting a new business
There is a laundry list of challenges that come with starting a new business, including:
managing cash flow;
a heavy workload;
business development and acquiring new clients;
taking on tasks outside your area of expertise; and
the pressure of making sound business decisions.
One of the biggest challenges faced by new businesses is that they may not make a profit for the first year or so. You may face inconsistent revenue and profit before you build up a stable client base.
Before you get started, it's important to consider how much money it may require to set up the business and establish yourself in your chosen market as quickly and efficiently as possible.
The benefits of starting a new business
If there's a laundry list of challenges, there's an even bigger list of potential benefits to starting a new business, including:
controlling how and how much you work;
the prospect of unlimited financial reward; and
Step 2: Identify Your Niche
A niche is the particular, targeted area of a market that you want your business to serve.
This article is really good at explaining how to identify your niche. A this stage, research, fact finding, imagination and creativity is the key.
Do not rush this stage; your niche will either make or break the foundational success of your new business.
Step 3: Formulate Your Business Plan
As the famous saying goes, 'A journey of a thousand miles begins with a single step!’. The starting point for any business is a unique idea that has the power to motivate. So, if you have decided to start your business, then you have most probably already gotten the idea.
So now, you can go to the next step. If you are still short of an idea, then do some brainstorming. Never be afraid of thinking outside the box, as that is what will make your idea stand out from others.
Do some research on your chosen market and try and identify trends and opportunities.
Write a formal, detailed business plan with achievable targets. Keep yourself accountable by diarising your targets so you can monitor how your business is progressing and whether you are achieving your targets.
Step 4: Find the Structure That Suits Your Business
Once you have decided on what business your business is going to trade in, the next thing that you need to do is find the structure that suits your business.
Choosing the correct business structure is very important. It will have a direct impact on your level of control, your regulatory obligations, the amount of tax you need to pay, health and safety requirements in the workplace, and the level of personal liability you will incur. Therefore, your business structure will significantly impact the way you run your business. It will also decide what is necessary for your business to be legally compliant.
Before registering your business, you must decide on what structure to follow, as every structure entails a different setup process. Your structure will vary depending on your circumstances and the kind of business you want to start. For instance, if you want to work as an electrician on a solo basis, choosing the sole trader structure might be beneficial for you.
The 4 main business structures in Australia are:
In this type of business structure, you are registered as the sole proprietor (i.e. owner) of the business. This means that you are the person who is responsible for all the legal aspects of running the business.
In a sole trader business structure, the business is indistinguishable from you and there is no legal separation between the two. This is important from a liability and a tax perspective.
Because you are the business, you are personally liable for any debts and liabilities the business incurs. This is because sole traders do not have limited liability, which means your personal assets are used as collateral against any liabilities your business incurs. This may create a risk of bankruptcy if you become unable to pay the business' debts as and when they fall due.
Further, and for the same reason that you are the business, you are taxed on your profit based on your individual tax bracket (rather than, for instance, a flat tax rate of 30% that companies enjoy on their profits).
As a sole trader, you are entitled to hire people who will work for directly for you.
In a business that is structured as a partnership, more than one person (usually two) run a business together.
In Queensland (for example), the Partnership Act 1981 (Qld) defines a partnership as the relation that exists between persons carrying on a business in common with a view to profit.
There are four main characteristics of a partnership business structure:
1. The identification of the individual partner with the firm – There is no separate legal entity in existence in relation to a partnership. The partnership or firm is not seen as a separate legal entity distinct from its constituent members (i.e. the partners). The partnership or firm is viewed as an aggregation of its individual partners.
2. Unlimited personal liability of each partner – Partners have unlimited liability for the debts of their firm (i.e. if partnership monies and property do not meet the firm’s debts, the creditors can seek execution of a judgment debt against a partner’s personal property (e.g. house or car)). Because each partner has the ability to legally bind the other, so it's important to only go into partnership with someone you trust, has complementary skills, and you have a partnership agreement drawn up by an experienced business lawyer.
3. Non-transferability of a partner’s interest – This means that, unless co-partners consent, a partner cannot transfer his or her shares in the partnership to someone, who is not already a partner, so as to make the transferee a partner (see further s 34(1) Partnership Act 1891). In contrast, the public trading corporation has as its essence the free alienability of shares.
4. Control by all of the partners – The Partnership Act provides in s 27(1)(e) that every partner may take part in the management of the partnership business (see s 115 Corporations Act regarding the restriction on the size of a partnership). In contrast, the public trading corporation places its management in the hands of directors rather than in the hands of shareholders.
Similar to a sole trader business structure, each partner is taxed on the profits of the partnership based on their own individual tax rates.
A partnership is created by the chosen partners entering into a partnership agreement. The partnership agreement doesn't to be in writing, but it is recommended that you do record your partnership agreement in a written contract.
When you set up your business as a company, it becomes a commercial business or entity that has a separate legal existence to its shareholders. In other words, the law sees a company like it is a separate person.
You may decide to register your business as a company if you do not want to be financially liable for the debts of the company. In that case, the profits made by your business will be taxed separately from your income. Your company will also enjoy the benefits of the fixed company tax rate, which is currently 30%. This can be beneficial if your individual tax rate on those profits would be higher than 30%.
Registering a company will also mean that you will not be held liable for the losses incurred by your business, unless you sign a director’s guarantee. Keeping all this in mind, it might be worth noting that you can change your business structure as it grows and evolves over time.
However, if you wish to trade under a different commercial name, you will have to register your company under a separate business name.
Setting up a discretionary trust (also known as a family trust) can help protect the assets of beneficiaries (which can include you as the business owner). If a company is set up as the trustee of the trust, the company (as trustee) bears the responsibility for the debts of the trust, and is generally entitled to be indemnified out of the trust assets. However, trust assets are often not retained within the trust itself, but distributed amongst beneficiaries.
Further, discretionary trusts allow for smart tax planning. A trustee can decide to distribute income to beneficiaries with lower marginal tax rates, reducing the overall tax paid on trust profits.
Trusts can also be an attractive business structure for certain business types as they benefit from a 50% discount on capital gains tax.
Step 5: Pick the Business Type That You Feel Confident About
Now that you have a structure in place, you can have a better understanding of the type of business you are going to need. You can choose from a myriad of business types. Some of the main types include an online business, an independent contractor, a franchise, etc. Every industry has its own set of legal obligations and regulatory requirements, which are different from one another. That is why it is crucial to pick the business type that you feel confident about.
Step 6: Choose the Name of Your Business
There are a few things to consider when choosing the name of your company.
You must select a business name (unless you are a sole trader and using your own name). If you have chosen to use a company structure, you can either use your company name or register a separate business name to trade under.
If you can't think of a company name or want some flexibility with the company name, you can use your company’s Australian Company Number (ACN) as your company name and register a separate business name.
The name of your company must show its legal status. For instance, most companies in Australia are proprietary limited or Pty Ltd companies.
You can search and reserve the name of your choice before registering your company, as you can only choose an available name. There are certain limitations on the words and phrases that you can use in your company name.
If you are a sole trader and you want to use a business name other than your personal name, you will have to register your business name. Once you have an ABN and a registered business name, you are ready to trade. In a partnership structure, you do not need to have a partnership agreement in place to trade, but it is highly recommended.
It is better to select your business name beforehand so that you do not need to make any changes to your website URL, logo or any other designs in the event of a change in your business name. If you create a business logo, patenting it is worth the trouble if you want to protect it from copyright infringement.
Step 7: Register an Australian Business Number (ABN) for Your Business
You cannot legally start a business in Australia unless you have an Australian Business Number (ABN), an eleven-digit number unique to your business. You have to obtain this number to register your business name. This number serves as a government identifier for tax purposes. You must have an ABN if you intend to register for PAYG Withholding or GST. Also, you have to display your ABN on receipts and invoices that you will issue to your customers.
Once you obtain your unique ABN, you will be able to:
● Register your business name
● Claim tax benefits such as Goods and Services Tax (GST)
●Identify your business to other entities for business operations purposes like sending invoices or ordering goods and services.
● Avail credits for energy grants, etc.
If you are applying for your ABN as a company, you will have to first register for an Australian Company Number (ACN). When your ACN registration is completed, you can then apply for your new company ABN. You can register your business name and ABN separately. However, it is easier as well as convenient to apply for both at the same time.
Step 8: Create A Positive Digital and Social Media Presence
Building an impressive online presence is vital for any business. Your website serves as the digital shop front for your business. It is your first point of contact with your customers and reflects your business’ credibility to them. Your website not only provides all the information related to your services but also helps in generating leads as well as building your brand image.
In today's world of technology, approximately 79% of Australians use smartphones and 81% of consumers research a product online before buying. That is why having a digital presence and a visible online footprint is vital if you want your business to succeed. Furthermore, you will be surprised to find that the cost of maintaining a website is very affordable and there are many platforms which may it easy to design your own website.
Take Into Consideration All Your Legal Needs Going Forward
Preparation, planning, and conceptualising are the key components of starting a new business. That is why following the tips discussed in this guide can help you in setting up a successful company in Australia. It is because, as exciting as it might be, you must analyse your business goals and set up a sound legal foundation to ensure that your business is legally compliant.
Need to speak to a commercial lawyer?
Prosper Law can help you with your exclusivity agreement or adding an exclusivity clause into a contract. Contact us today for a fixed-fee, no obligation quote.
Want to read more? Check out this article which explains what an exclusivity agreement is.
Author: Farrah Motley | Legal Principal
PROSPER LAW - A Commercial Law Firm for Businesses
M: 0422 721 121