Starting a business can be an exciting and rewarding endeavor, but it’s important to set up your company properly to ensure its success. In this blog post, we will cover the key factors to consider when setting up your company.

Before diving into the details, it’s important to understand why setting up your company properly is crucial. By properly structuring your company, you can protect yourself and your shareholders from personal liability, ensure a clear understanding of how the organization is run, and set the foundation for long-term growth and success.

Company Structure

When starting a business, one of the most important decisions you need to make is the structure of your company. This decision will determine your liability, funding options, and the responsibilities of the individuals or roles that make up your company. In this blog, we’ll be discussing these three key aspects of company structure.

Limited Liability

One of the primary benefits of incorporating a company is limited liability. This means that the company is considered a separate legal entity, and its liability is limited to the assets held by the company. Creditors cannot seize the personal assets of the directors or shareholders unless there has been illegal activity, such as insolvent trading or fraud.

However, it’s important to note that the courts may potentially “tear the veil of incorporation” and grab the assets of the members or directors if there has been an illegal activity that they were personally responsible for or should have known about. So while limited liability is a valuable protection, it’s not a license to engage in illegal or unethical behavior.

Appropriateness Of Structure

When choosing a structure for your business, you have several options available to you. You can operate as a company, a family trust (also known as a discretionary trust), a sole trader, or even under a trust under a superannuation-type entity. Each of these structures has its own benefits and drawbacks, so it’s important to consider your specific needs and circumstances when making this decision.

For example, a family trust may be appropriate if you’re looking to protect your assets and minimize your tax obligations. A sole trader structure may be simpler and less expensive to set up and manage, but it also exposes you to unlimited personal liability. Ultimately, the structure you choose will depend on a variety of factors, including your goals, the nature of your business, and your risk tolerance.

Responsibilities

Finally, it’s important to consider the responsibilities of the various individuals or roles that make up your company. Directors, for example, have a fiduciary duty to act in the best interests of the company and its shareholders. Shareholders have the right to vote on important decisions, such as appointing directors and approving major transactions. Employees have legal rights and protections, including the right to a safe and fair workplace.

By clearly defining the roles and responsibilities of everyone involved in your company, you can help ensure that everyone is working towards the same goals and that the company is operating in a legal and ethical manner.

Funding

Finally, funding is a critical aspect of any business, and the structure you choose will have an impact on your options. Issuing shares is one of the most common ways for a company to generate equity and finance its operations. You can also obtain loans from financial institutions or other lenders.

When seeking funding, it’s important to understand the terms and conditions of the funding source and to ensure that you’re comfortable with the associated risks and obligations.

Rules That Operate The Organization

The rules that govern the operations of the organization are fundamentally established in the Constitution. This essential document outlines the specific procedures for conducting voting, determining when voting is to take place, the election of directors, their duties and obligations, and the financing aspects, including the types of shares and the methods for obtaining funding.

Name Of The Organization

While it is possible to have a company name that differs from the business name, careful consideration should be given to selecting an appropriate company name. Certain words or phrases may be unsuitable, such as those that are inappropriate or reference government institutions that cannot be used during incorporation or registration. 

It is crucial to keep in mind the market in which the organization will operate, the services it will provide, and how memorable the company name should be to clients and the wider community.

The Directors Operating The Company

Directors are essential individuals required to establish and manage a company. Generally, two types of directors exist: executive and non-executive. Executive directors manage the company’s day-to-day operations, while non-executive directors are not involved in making executive decisions. It is crucial to have non-executive directors on the board of directors because they offer a fresh perspective, uninhibited by prior executive decisions. They can make decisions without being restrained by ego or prior decisions, which can benefit the company in the long term.

The Shareholders

Shareholders play a crucial role in financing the company and may possess unique experiences that can influence voting decisions. 

For instance, investors may have extensive knowledge of the industry and therefore select directors with suitable backgrounds to lead the organization. Shareholders can consist of family members or individuals approached directly, depending on whether the company is publicly listed on the Australian Stock Exchange or privately held. Private companies cannot solicit the general public as they have not undergone the process of listing publicly.

Company’s Place Of Business

This location serves as the hub of operations, such as the factory. The Registered Office, on the other hand, is where the company may conduct administrative tasks, like managing communications or holding important meetings. For instance, a company may choose to establish an office in the central business district to facilitate these activities.

Share Structure

Moving on to the share structure, it is crucial to understand the different ways in which a company can generate funding. One common method is through ordinary shares, which provide voting rights to the shareholder. Another type is preferred shares, which do not offer voting rights but are given priority when it comes to receiving dividends. Additionally, companies can issue options, which give shareholders the choice of obtaining more shares in the future, albeit with an expiry date.

Necessary Registrations For Conducting Business Operations

This pertains to the necessary registrations for conducting business operations, which include GST (Goods and Services Tax), Pay As You Go (PAYG) withholding, Pay As You Go installments, superannuation, registering for an ABN (Australian Business Number) to issue tax invoices with GST, and obtaining tax file numbers to complete the tax return at the end of the financial year.

Business Plan

Finally, the ninth point to consider is the development of a comprehensive business plan. A well-structured business plan is crucial in establishing a clear direction and understanding the potential risks and opportunities associated with your venture. While some may choose to operate without a business plan, having one in place can provide a valuable roadmap for decision-making during challenging times. It can include contingency plans for unforeseen issues and outline strategies for addressing competitive pressures, legal concerns, and other potential obstacles. 

Additionally, seeking guidance from a business coach or consulting with professional advisors such as accountants or legal experts can be an effective way to refine and strengthen your business plan.

Takeaway

In summary, starting a business requires careful planning and attention to detail. Before launching your venture, it’s important to consider various aspects of the business such as legal structure, company name, directors, shareholders, place of business, share structure, registrations, and a business plan. By taking the time to address each of these components, you can set your business up for success and avoid potential issues down the road. Remember, a well-thought-out plan can be a valuable tool in navigating challenges and achieving your business goals.

If you’re looking for expert accounting and tax advice for your business, don’t hesitate to get in touch with Mina at Pinnacle Accounting Advisory. With his extensive experience working with businesses of all sizes and industries, he can provide you with valuable insights and help you optimize your financial strategy. 

You can reach Mina at +61431413530 or via email at mina@pinnacleaccountingadvisory.com.au. Take the first step towards financial success and contact Mina today.

In this blog we will cover three very important things your accountant could be doing now to save you money and help you grow your business.

Firstly, we’ll cover the importance of tax planning. Then, we will discuss how business strategy can grow your business. Lastly, we will delve into the importance of having a trusted network of professionals to help you on your business journey.

Tax Planning with your small business accountant

Small business accountants understand how to use different trading structures. Because of this, they will ask you questions to check what is best for you and then make a suitable recommendation.

Further, the accountant will also have a strong understanding of the different tax rates which apply to trading entities and explain this to you based on your unique needs and situation.

In other words, this process, known as Tax planning, can save you a great deal of money by applying legal avenues to save you tax and allow you to reinvest these funds into the business.

Because of these savings, you can reinvest the money into the business through advertising or the purchase of manufacturing plant. As a corollary, business revenue will grow and so will the business profit.

Because we are Chartered Tax Advisors, we have cutting edge tax and business knowledge.

As a result, we are able to save you money on tax and help you grow the business. Why wait, call us today for a confidential, obligation free initial chat.

Business Strategy with your small business accountant

A CPA has very good commercial understanding of the market.

This understanding of the market can be broken down into the following 7 key areas which the accountant can assist you with:

1. Establishing your why
2. Market Analysis
3. S.W.O.T Analysis
4. Marketing Plan
5. Unique Selling Proposition
6. Best trading Structure
7. Connecting you with other professionals

Trusted Network

Your small business accountant works with many professionals. Therefore, they can connect you with the following:

• Commercial Lawyers
• Family Lawyers
• Marketing people
• Conveyancers
• Financial planners
• Auditors
• Finance Brokers
• Mortgage Brokers

Above all, they are able to connect you with the right professional for your unique needs and personality type.

Submit an Inquiry.

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The tax rates for an entity in Australia will be different depending on the type of entity used.

We will go over the rates for the most often used structures.

Entities

We will review the following 7 entities:

1. Individual
2. Partnership
3. Company
4. Discretionary or family Trust
5. Unit Trust
6. Self Manager Superannuation Fund (SMSF)
7. Joint Venture

Individual tax rates

Individual rates tend to be different each year. For the 2021 financial year, the rates were:

These may also need to be paid:

• Medicare Levy (ML); and
• Medicare Levy Surcharge (MLS)

The Medicare Levy rate is 2%

See the table below for the MLS rate:

The thresholds above increase by $1,500. This is to say, for each dependent child after your first kid.

Click here to check the historical individual rates.

Click here to check the historical MLS rates.

Partnerships

A partnership needs to complete a tax return. With that said, the partnership does not itself pay tax. In addition, the partners pay tax if applicable. In other words, if the partner is an individual then they will pay tax. Whereas, if the partner is a trust then the trustee or the beneficiary of that trust is likely to pay the tax.

Company Tax Rates

The company is the most used business entity.

As a result, the rate for a trading company, which is a based rate entity, in the 2022 financial year is 25%. However, if the company is not trading and is not a base rate entity, then the rate is generally 30%.

Subsequently, To learn more about establishing a business click here.

Also, you can check the company rates now by going to the ATO website which speaks more about Changes to company rates.

Discretionary Trust/Family Trust

This entity is not taxed if the beneficiaries are entitled to all the income of the trust. Consequently, If this is not the case, the trustee will be taxed at the highest individual marginal rates.

In addition, the trustee will pay the MLS.

Unit Trust

The ATO does not assess this type of entity. Therefore, unit holders may have to pay tax depending on the type of entity they are. That is to say, the unit holder may be a discretionary trust with one individual beneficiary. As a result, the individual beneficiary will be taxed but not the discretionary trust.

Likewise, a partnership unit holder will not pay tax either but the partner’s will pay tax if they are a company, self managed superannuation fund or individual.

Joint Venture

The tax authorities don’t tax joint ventures. Further, members must avoid receiving income jointly for this to take place. For example, receiving income jointly is raising an invoice as the joint venture.

Speak with us now

Understanding various tax rates and how the array of entities work together to reduce tax is complex.

Contact us if you require assistance. We offer you a free initial discovery session to see how we can support your big vision.

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This article is designed to articulate a high-level general overview of some of the most important tax considerations for those in business and entrepreneurship. The article is not comprehensive in nature and professional advice should be sought to ensure correct application of issues mentioned where required.

Topics Covered

• Hobby or Business
• GST Threshold
• Motor Vehicle Cost limit
• GST on Motor Vehicles
• Payroll Tax
• Superannuation
• Award Rates
• Fringe Benefits Tax (FBT)
• Single Touch Payroll (STP)
• Division 7A

1.   Hobby or Business

A hobby can be considered a business where a profit-making intention can be established, where profit has been made or the acts of a person show there is intent to operate as a business.

The following factors may indicate that a profit-making intention and business exist:

• Registration of a business name
• Obtaining an Australia Business Number (ABN)
• You make a profit
• Repetition of business activities
• The size or scale of the activity is parallel with the activities of other businesses in your industry
• The activity is planned, organised and executed in business like fashion.

The indicators that an activity is planned, organised and executed in business like fashion may include:

• Keeping business records and account books;
• Having a separate business bank account;
• Operation from business premises; and
• In possession of licences and qualifications.

Worth noting is that an activity can begin its life as a hobby and morph into a business. An example is where an individual acquires an SLR Digital camera and proceeds to take photos at events and posts such photos on social media. Such photos receive praise from their viewers and the individual realises they have a natural flare and affinity for photography. They are encouraged to start a business. The individual decides to do just that and begins to plan. From this instant, it could be established the individual has left the territory of photography being a hobby to the pursuit of photography as a business.

Where the hobby has become a business and the activity is generating a loss, you may be able to offset the business loss against your salary and wage income for tax purposes subject to meeting the non-commercial business loss tests. The non-commercial business loss tests are complex and discussion thereof is outside the bounds of this article. You should seek the advice of a qualified tax agent in this regard before applying such tests. 

2.   GST Threshold

The Goods and Service Tax (GST) is a tax payable by the end consumer (other than businesses not registered for GST). Businesses with turnover in excess of $75,000 must register for GST.

Not for profit organisations which provide products or services must charge GST where their turnover is greater than $150,000.

Some businesses are GST exempt, such as those providing medical services and do not need to register for GST. This means they do not include GST in the fees they charge their patients.

However, registering for GST allows such businesses to claim GST credits on items and services they use to conduct their business.

3.   Motor Vehicle Cost Limit

As per the Australian Taxation Office’s definition, a motor vehicle means a motor-powered road vehicle and does not include a road vehicle where the following apply:

• The main function of the vehicle is not related to public road use; and
• The vehicle’s ability to travel on a public road is secondary to its main functions.

Examples of vehicles meeting the above definition include but are not limited to:

• Trucks, tractors and earth moving equipment.

Vehicles purchased are subject to a Motor Vehicle cost limit of $57,581 for the 2019/2020 financial year. This means vehicles purchased above this limit will have deductions, which may cover numerous years, limited to the above-mentioned figure.

This figure is regularly indexed and should be checked each year by referring to ATO guidelines.

4.   GST on Motor Vehicle Cost Limit

If your business is registered for GST, you may be eligible to claim GST credits equal to one eleventh of the Motor Vehicle cost limit.

This usually translates to $5,234.

Other business assets are not subject to this limit and therefore the full GST credits applicable can be claimed.

5.   Payroll Tax

Payroll tax is payable by employers where their payroll exceeds either a monthly or annual threshold provided by each Australian state and territory.

The website below mentions the payroll tax thresholds and percentage rates applicable for each state and territory.

https://www.payrolltax.gov.au/harmonisation/payroll-tax-rates-and-thresholds

6.   Superannuation

Superannuation is required to be paid for each employee where that employee earns $450 or more per calendar month.

The minimum superannuation payable is an additional 10.00% of the wage or salary paid. This should be stipulated in the contract with the employee. Generally, employers combine the salary, wages and superannuation as a total remuneration package offered to their employees.

See link below for table of rates and years to which they apply.

https://www.ato.gov.au/rates/key–superannuation-rates-and-thresholds/?page=22

7.   Award Rates

Certain employee pay is subject to minimum pay rates prescribed by Fair Work Australia. Paying employees in industries such as the hospitality industry below these rates is illegal. To determine the applicable rates for your employees based on the industry in which you operate, navigate to the below mentioned link and search for your industry.

https://www.fairwork.gov.au/

8.   Fringe Benefits Tax (FBT)

Fringe benefits tax is payable at a rate of 47% by employers on benefits provided to employees or the employees associates. This is the case even if the benefit is being provided by an external provider under an agreement with the employer.

These benefits could be the ability to use a company car for the employee’s private purposes or paying for an employee’s holiday. FBT is a complex area of tax and professional advice should be though if you are considering providing benefits to your employees.

9.   Single Touch Payroll (STP)

STP is a new way to report employees’ tax and superannuation information to the ATO. This information is now reported every time a business runs its payroll. This is a standalone process to preparing the Monthly Pay As You Go Withholding statements and the monthly Business Activity Statements where applicable.

As of 30 September 2019, all businesses which employ staff must be registered for STP and report the information to the ATO.

You can navigate to the ATO website using the link below to check out the no cost or low cost platforms available to satisfy the STP reporting obligations.

https://softwaredevelopers.ato.gov.au/no-cost-and-low-cost-solutions-single-touch-payroll

When considering which provider to choose, it is important to determine if such programs integrate with other business systems to ensure a streamlined no fuss solution is implemented.

10.   Division 7A

Where using a company structure in your business then you need to be cognisant of Division 7A of the 1997 Income Tax Assessment Act.

A company is a separate legal entity and stands alone from its directors and shareholders. As such, any income generated by the entity must be provided to shareholders and directors via declaration of a dividend.

Where profits in the form of drawings are taken out of the company without a dividend being declared, Division 7A is triggered and may deem this to be a dividend to which the benefit of possible attached franking credits (also known as imputation credits) is disregarded. This is a disadvantageous spot to be in. Division 7A is another complex area of taxation for which further advice should be thought. 

Conclusion

As can be seen, the above information provides a broad overview of various tax considerations when operating a business. The ATO website is a good resource to use to find out more. Another great website to visit to learn more about money and business is the Australian Securities and Investment Commission’s (ASIC) Money Smart website.

Questions? Fill out the form below and we’ll reach out to you.

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