What do you do when starting a new business?
When starting a new business, there are several things that must be considered. This publication sets out an outline as to the key issues to be considered when commencing a new business.
The entity of the business
Some businesses, especially small businesses, simply register their individual names for GST purposes as sole traders and use that entity name as their operating entity. Although this is adequate, such structure tends to lack the necessary protection that other businesses may enjoy.
The most common entity structure of the business is to be done by registering a company that is proprietary by nature and limited by guarantee. This is known as a Propriety Limited company.
The advantage of having such structure is to limit liabilities against the owners of the business in some instances. For example, if the business becomes insolvent, which from time to time occurs for some businesses, the owners may not necessarily be personally liable for the debts and liabilities of the business. Although each debt and liability must be considered separately, the protection provided by a company that is proprietary by nature and limited by guarantee must not be overlooked.
The way to obtain such structure is by registering a company with the Australian Securities & Investments Commission (“ASIC”).
The next thing to consider is whether or not the business should be registered for GST purposes. Although some businesses that earn less than the threshold necessary to register for GST, we recommend that an active business should always be registered for GST purposes. The reason is, GST may be set off against other GST payable or paid by the business each year at the end of the financial year. We always recommend that a business owner consults the tax accountant or a tax lawyer for GST advice.
A company must have at least one (1) director and at least one (1) shareholder. However, a company may have up to three (3) or four (4) directors. If the company wishes so, and also the company may have as many shareholders as practicable.
The difference between a director and shareholder is that the director has executive powers of a company. In other words, the director may make day-to-day decisions about the operation of the business. The director may also enter into contracts and contractual agreements on behalf of the company.
Shareholders, on the other hand, may not have the power to have the day-to-day control of the company. However, shareholders may make decisions about major decisions of the company as well as the appointments or removal of directors. This is done pursuant to the Constitution of the business, which is often drafted at the registration of the entity of the company.
Therefore, it is important to decide whom to be a director and whom to be a shoulder.
The next step to be considered is whether or not to register the name of the business, or its logo, or a distinct feature of the company as a trademark. It is always a better choice to have the name and the logo and any other distinctive feature of the business registered as a protected trademark.
However, as this may incur additional costs, this may be a commercial decision to be considered for very small businesses. We highly recommend the registration of a trademark because even though it is a small business, as the goodwill and reputation of the business will eventually accumulate over the years. The value of the business will be determined often by its trademark as well as it is location. On that basis, a registered trademark may be a valuable asset of the business in the future.
A new business, as it starts, will most likely be entering into contractual obligations. This could be for instance, a lease agreement, or a supply agreement, or an employment contract. It is strongly recommend that such contractual obligations are entered into using the entity of the business as a registered company and not through the individual owners or operators of the business.
This may not always be the case, because some contractual obligations will require the directors of the company to give a personal guarantee. Nonetheless, such contractual obligations binding the owners or the operators of the business as individuals should always be limited, in order to limit the liability and obligations of the owners and operators of the business personally.
Some businesses may adopt and operate a business through a franchise. This may reduce the future risk of the business not operating successfully, but in this case the structuring of the business should never be overlooked.
Operating a Business as a trust
Some businesses may reduce their tax obligations by operating a trust through the business. For example, a company may trade as a trustee for a family trust. The purpose of such structure is to distribute the profits of the business amongst family members to reduce the overall taxable profit of the business. You should always consult your tax accountant or a tax lawyer as to whether or not it would be beneficial for you to operate a trust.