Stepping into Startup Part 3: Choosing The Best Business Structure For Your New Venture

So, you’ve finally decided to become your own boss. You’ve hatched that brilliant new idea and you’re ready to kickstart your new venture with intent. Or maybe, you just want some flexibility and have chosen to join the gig economy like becoming a courier, an uber driver or a removalist.

A gazillion questions are mulling around in your head.  What’s the best way to bring your venture to market? What’s the best business structure for starting your new business? Should you go it alone? Or, do you have a partner you need to include in all your decision making? What about capital requirements? How much money do you need to bring it to market?

And where can you find answers to these questions without having to visit a gazillion sites?

A simple solution

Welcome to Veromo. We believe that starting and growing a business shouldn’t be so hard and so we’ve simplified the process for you. Our seamless registration process makes it easy for you to open your doors for business. In addition, we‘ve put together a comprehensive ABC of  FAQ’s to answer all the possible questions you may have. Furthermore, in this article, we’ve unpacked all the regulatory business structures available to you in Australia, to ensure you make the right decision.

When setting up a business, the same fundamental processes and considerations apply, regardless the industry you’re entering. The starting point however is to decide on the type of legal business structure that will best suit your needs. An early decision on this can help overcome many potential roadblocks in the future.

The type of business structure you choose directly impacts your day to day operations from the level of paperwork involved, to the amount of taxes you have to pay, your personal liability as well as your potential access to future growth funding.

What’s the difference between an ABN and an ACN?

No matter the structure, all businesses in Australia require an ABN (Australian Business Number), but don’t confuse this with an ACN (Australian Company Number).

Simply, the difference lies in understanding the type of business structure that you plan to set up. Most businesses in Australia require an ABN, whilst an ACN is only applicable if you want to register a Company.

Both ABN’s and the ACN’s are important identifiers for your business. You must include them correctly on all documentation, otherwise you may breach company and tax laws.

ABN unplugged

An ABN is a unique 11 digit number issued by the ATO (Australian Tax Office). The ATO uses this number to keep track of your Business Activity and Tax.  Sole traders, partnerships and companies all require an ABN.

The purpose of ABN is to clearly identify yourself or your business when dealing with clients or other businesses. Although not compulsory, there are certain instances where it is mandatory and they include:

• If your business is turning over more than $75,000 per annum
• If GST credits (Goods and Services Tax) will be claimed
• You don’t want a company to deduct PAYG (Pay As You Go) Tax on payments you get
• Your business will benefit from accessing energy grants and credits
• An Australian .com.au is your preferred domain
• You have opted to enter the gig working economy

ACN unplugged

An ACN is a unique 9 digit number that ASIC (Australian Securities and Investment Commission) issues if a business is registered as a company. It is a legal requirement for the ACN to be displayed on a range of documents, including invoices, official company notices, cheques and business letterheads.

What legal structure is good for me?

Choosing the correct legal structure for your business is one of the most important decisions you will make. Each structure has its own set of rules, factors and risks that come into play and which can impact how the business is run or managed. Some key considerations you will need to take into account include:

• Who will own the business
• How much control will you have
• What role will you play in the business i.e. will you be an employee or the owner
• Your potential personal liability
• How much tax you pay

Sole trader

This is the simplest type of business structure and is relatively inexpensive to set up. As a sole trader, the day to day business decision making is your own responsibility.  You, as a result, are personally responsible for all debts and losses that may be incurred.

Pro’s:

• It’s easy to set up and is generally a low-cost structure to operate
• Only requires an ABN if turnover is in excess of $75,000 per annum
• You have full control of your assets and all business decision making
• You can use your individual tax file number (TFN) to lodge tax returns
• It has fewer reporting requirements, however you must legally keep financial records for at least 5 years
• You can use your personal bank account to run the business, although the recommendation is always to keep a separate business bank account

Con’s

• Unlimited liability, therefore all your personal assets are at risk if things go wrong
• You are not able to split business profits or losses made with family members
• You are personally liable to pay tax on all the income derived

Partnership

A partnership is a business structure made up of 2 or more people with shared responsibility for the income or losses incurred whilst running the business. In addition, we recommend that there is a water tight partnership agreement that clearly defines your shared vision.

There are 3 main types of partnerships:

• General partnership (GP) – In a general partnership, all partners share the responsibility for managing the business equally. Each partner as a result, has unlimited liability for the debts and obligations incurred.
• Limited partnership (LP) – A Limited Partnership, is a form of general partnership where liability is limited to the amount of money each partner has contributed. In most instances, Limited Partners are passive investors who are not actively in involved in the day-to-day management of the business.
• Incorporated Limited Partnership (ILP) – An ILP structure allows for partners who have limited liability for the debts of the business. With an ILP,  there must however be at least one general partner (s) with unlimited liability so that in the event that the business cannot meet its obligations, the general partner(s) are personally liable for the shortfall.

Pro’s

• It is mandatory for all Partnership structures to apply for an ABN
• It is generally a low-cost structure which is easy to set up
• You only need to register for GST if turnover is $75,000 or more
• Requires separate tax file numbers (TFN) to lodge tax returns
• Each partner only pays income tax on the share of the net partnership income each receives, not on income earned
• Partners can use their personal bank account to run the business, however a separate business bank account is always recommended
• It has fewer reporting requirements, however you must legally keep financial records for at least 5 years

Cons

• You have less individual autonomy
• It requires additional paperwork as a partnership tax return must be to be lodged annually with ATO
• Superannuation arrangements – each partner is responsible for their own superannuation
• Similar to a Sole Trader, partners’ personal assets are at risk if things go wrong

Company

A company is a separate legal entity on its own. A company has the same rights as a natural person and as result it can incur debt, sue, and be sued.

In your capacity as a company director, you are not liable for the company’s debts. Your only financial obligation is to pay the company any amount unpaid on your shares (if you are a shareholder), if you are called on to do so. In addition, you as a company director, may be held personally liable if you are found to be in breach of  any legal obligations

Pro’s

• It is a separate legal entity which means company members have limited liability
• With wider access to capital, it may provide a faster opportunity for growth

Cons

• It is a more complex business structure to set up and the money earned belongs to the company
• You need to lodgement of an annual company tax return with the ATO
• It requires the completion of an annual review and the payment of an annual review fee
• Each director needs to submit an annual declaration of solvency
• It costs more to set up and run with all business operations controlled by the directors and owned by the shareholders
• Regulatory requirements are more onerous and requires you to comply with all obligations under the Corporations Act 2001. These include:
  • Paying a minimum of 9.5% of earnings as Superannuation Contributions on on behalf of your employees, including you, as a Director
  • If the Company employs people, it will incur PAYG contribution obligations

That wraps it all up.  You now know the difference between the various business structures that are available to you. You are therefore well positioned to decide which is best for you. If however, you still have some questions, we recommend that you speak to your financial advisor for further expert advice.

Once you’ve made your decision, Veromo will help you register your best business structure and within 24 hours you’ll be ready to go.

In our next series we will unpack the benefits of Registering a Company and what your legal obligations are in more detail.