The Australian Government pledged $7.8 million to support the national online business name registration system. In an effort to recoup the money, the Australian Securities and Investments Commission will slightly raise the price for both the one and three year business name registration.  $1.3 million dollars of the money earned from the price increase will be used by ASIC to improve the registration system and to expand the support services of the call centre for the benefit of new business owners.

According to Start up Smart, the government has also made a promise to lessen compliance costs for new start-ups. The department of Finance and Deregulation and the ATO will receive $80 million from the government to re-examine the Australian Business Number system and to regulate the business name registration process.

By reforming the business registration system and putting in place more strict regulation at the ABN registration stage of business start up, the federal government hopes to generate a revenue of $106.4 million.  According to legal experts, small businesses can expect a higher level of enquiry when registering their business, such as providing more documentation. Non- compliant businesses or start-ups which provided wrong or misleading information at the beginning phase of setup will be penalised. Making a false or misleading claim on an ABN application may cost the applicant $10,200 in penalties.

With the increased government funding the ATO will be much quicker at picking up and tracking down inaccuracies and false details on documentation.

PCI Partners was formed on 1 July 2012 comprising four directors that are some of the most experienced insolvency practitioners in Australia and able to give you direct access to their 25 years plus experience. They can assist your clients with their personal and corporate insolvency issues by giving options to improve their position and in the worst case scenario, recommending a formal insolvency appointment.

By recognising the warning signs of insolvency and implementing strategies to minimise risks, Accountants, Owners and Managers may potentially avoid business failure or take steps to minimise personal risk.
To determine whether a business is insolvent, a number of factors are relevant. Accountants, Owners and Managers need to be able to assess solvency. The following 10 factors should be considered in making that assessment.

1. Business Aesthetics
Not all indicators of insolvency may be found on a spreadsheet. A tell-tale sign may be the look of the organization itself. A prosperous business is in a position to spend more on the upkeep of its premises. It stands to reason that if a business is struggling, it will not be able to divert funds to the maintenance of its premises.
Similarly, employees may provide an indication of the success of a business. Staff are usually aware of how successfully a business is operating, and their mood can reflect this. For example, a successful business may have happier, more productive employees, whilst where a business is struggling staff morale may be low.

2. Insufficient and inaccurate books and records
Section 588E(4) of the Corporations Act states that if a company does not keep comprehensive and correct records of its accounts and financial position, or if it does not keep records of a transaction for seven years after its completion, then that company will be presumed to be insolvent during the period to which the records relate.
During tough times, the Owners and Managers of a business may not focus on maintaining books and records. However, it is essential that books and records of a business are maintained to avoid the statutory presumption of insolvency.

3. Forecasts and plans
Every business requires a detailed budget and cash flow for the coming financial or calendar year. Without these, business operators are unable to monitor results or make useful planning decisions. Any budget and cash flow must be based upon logical and informed interpretations of data.

4. Dishonoured payments
Withholding of payments to creditors, bounced cheques and dishonour fees are good indicators of a business’ inability to keep up with payments when they are due and payable or within the terms of trading agreements. This may be symptomatic of a business that is struggling to make ends meet, particularly where such payments are related to unpaid taxes or other statutory liabilities.

5. Increased aging of creditors
Any overall increase in the time that it takes to make payments to creditors can indicate that a business is struggling financially and may have limited cash flow to meet payment obligations. In this situation a business may prioritise paying some creditors over others with large lump-sum payments, or choose which creditors to pay on time and which to pay late, depending on its need for the respective supply. These strategies may suggest that a business has had to ‘tighten its belt’ by restricting available funds and making payments to essential suppliers first to maintain trading operations.

6. Altered credit terms
When a creditor’s payments are continually delayed, creditors may respond by altering their trading terms with a business. For example, a supplier might reduce trading terms, enter into a payment plan to enable the business to pay an overdue account or place them onto cash on delivery terms until any outstanding amounts are satisfied. These actions indicate that a business is no longer able to satisfy its debts as and when they are due, and is clearly experiencing financial difficulty.

7. Delay of tax payments
As detailed above, businesses with limited funds available may choose to prioritise certain payments over others, i.e. paying the most essential supplier first. Often, payments of statutory taxes such as PAYG and GST are delayed as they do not immediately affect the operations of a business. In the short term, this delay may improve a company’s cash flow.
The recent amendments to the Director Penalty Regime (see Issue October 2012) mean that directors may be held personally liable for outstanding PAYG withholding tax, should the amount have not been reported and be in excess of three months of the date on which it was due. Consequently, non-payment of such tax by a business would be considered a strong indicator of insolvency. A business may enter into a payment plan with the ATO to repay PAYG tax, which only confirms insufficient cash to meet business debts as and when they fall due.

8. Delay of superannuation contributions
In an effort to improve short term cash flow, a business may delay the payment of its employee superannuation contributions. As these contributions are usually paid quarterly, overdue amounts may not be recognised as such until some time after the due date.

As with delayed tax payments, delayed superannuation contributions may indicate that a business is struggling to manage a limited cash flow. The amendments to the Director Penalty Regime detailed in our October issue means that the director of a company may now be held personally liable for unpaid superannuation contributions in certain circumstances. Consequently, non-payment of superannuation contributions by a business would also be considered a strong indicator of insolvency.

9. Bank overdraft limit reached
An indicator of insolvency is whether a business regularly trades at or close to its overdraft limit. This situation would be exacerbated where the respective financial institution strictly monitors the overdraft limit regardless of the needs of the business. If a business regularly trades at its overdraft limit, it means that there will be little to no emergency funds available should they be required.

10. Legal action
Legal action issued against a business will result in the business incurring the financial cost of defending any claim which could impact on future cash flow and should be taken into account when preparing budgets and cashflow forecasts. Obviously, unsatisfied judgments which have not been appealed would indicate insufficient cash flow to satisfy debts as a when they fell due.
If a business is faced with a winding up notice, a statement of claim relating to unpaid accounts or if a director penalty notice has been issued, it would ordinarily be considered that the business is insolvent.

To find out more about the information covered in this newsletter or to discuss any issues pertaining to personal or corporate insolvency matters, telephone PCI Partners on 03 8636 3333 or e-mail Philip Newman.
To learn more about PCI Partners and how they can help you, please visit their website at www.pcipartners.com.au.

To explain in more detail – An ABN is a unique sequence of 11digits allocated to a business which is earning revenue.  The ABN is similar to a Tax File Number in that it helps the ATO maintain proper records on all businesses trading in Australia.  Most trading entities such as sole traders, partnerships, companies and trusts are eligible to register for an ABN.

When starting a business, although it’s low on the list of things new entrepreneurs are thinking about, the ABN registration process should be a priority.  Without this unique, identifying number it may be difficult to move forward.

Customers, for instance are entitled to withhold 46.5% of any payment when the supplier does not have an ABN. For a new business owner, who needs as much cash-flow as possible, such a high withholding can be detrimental.

Since ASIC has taken over the business name registration process, the application process for business name registration now dictates that the applicant must hold a valid ABN. Without this ASIC will not register a trading name.

Once a business reaches the $75,000 earnings threshold, it is eligible to register for GST, providing it already holds an ABN.  Registering for GST may help legitimise a business in the eyes of perspective customers or partners.  GST is a good indication of the validity of a business.

To register a domain name ending in .com.au or .net.au having an ABN or ACN is a requirement.  Only registered sole traders, businesses or companies are entitled to these domains.

Another benefit of registering for an ABN is the opportunity it provides for applying for government grants and loans. Essentially, nearly every government association which awards money to small business requires a business to have an ABN.

Once an ABN is issues to an entity it will always remain the same. Although an ABN should be deactivated if the entity ceases to trade, it can always be reactivated in future.

Registering for an ABN is not too difficult, nor is it very time consuming. The applicant must answer a series of questions about the nature of the business as well as who the representative individuals are, their responsibility in the business and their personal details such as TFN, birthdate and residential address.

Upon completion of the ABN application, an ABN may be allocated in real time, or the ATO may need to manually review the application which can extend the allocation period to up to 28 days. In the case that the ABN is not allocated straight away, the ATO will send the ABN via post to the address of the business representative.

Once an ABN is established it is public information, searchable on the abr.gov.au website. The register will show information such as the date the ABN was established, the name of the entity, the postal code of the representative, as well as any trading names associated with the ABN. In special cases, certain public information may be supressed upon request.

Having the right business structure can save you time and money.

The four most commonly used business structures in Australia are: 

• Sole traders

• Partnerships

• Companies

• Trusts

There are real advantages in choosing a structure best suited to the way you want to operate your business. It’s important you understand these advantages and responsibilities as they may affect

• the way tax applies to your business

• protection of your assets

• your operating costs 

• how other businesses deal with you.

You should use this information as a guide only. We recommend you talk to an accountant,tax professional, solicitor or other adviser before deciding which business structure to use.

1. Sole traders

If you operate your business as a sole trader, although you may decide to have employees, you trade, control and manage all aspects of your business.

Advantages: 

• There are very few legal and tax formalities involved setting up the business.
• The structure is inexpensive to set up.
• You have full control of the business.
• You receive the full benefit of profits made by the business.
• You keep all the after-tax gains if the business is sold.

Things to consider:

• Your access to finances is usually limited to your own resources.
• If you have no employees, you usually have to do all the work.
• You are legally responsible for all aspects of the business.
• Debts and losses cannot be shared.
• You can lose private assets such as your home, contents and vehicles if the business goes into debt.

Reporting and paying income tax:

As a sole trader, you need to report the business income you earn (after expenses) on your personal income tax return, along with any other income you earn.
You pay the same tax as any other individual and you’re also entitled to the tax-free threshold (the first $6,000 you earn in an income year) if you’re an Australian resident.

Paying super:

You’re responsible for your own super arrangements and may be able to claim a deduction for personal super contributions you make. You must also make super contributions for any eligible workers you employ.

2. Partnerships

If you operate your business as a partnership, you’re carrying on your business with one or more other people as partners and receiving your income jointly.

Advantages:

• Partnerships are inexpensive to set up.
• Greater access to finances from the resources of all partners.
• There are more people to share the work load.
• There are more people to share losses and legal responsibilities.

Things to consider:

• You must share the profits with the other partners.
• You and your partners are responsible for the debts of the partnership, even if you do not directly incur or cause the debt.
• You can lose private assets such as your home, contents and vehicles to settle debts of the partnership.

Reporting and paying income tax:

Although your business does not pay tax, you need to lodge an annual partnership income tax return on behalf of the business to show the total income earned and deductions claimed by the business.
The tax return also shows each partner’s share of net partnership income.As a partner, you need to pay tax on your share of the partnership income (less expenses) you earn.
under a partnership, each partner is personally liable for the tax debts of the partnership.

Paying super:

As a member of the partnership, you’re responsible for your own super arrangements as you’re not an employee of the business. You may be able to claim a deduction for any personal super contributions you make, and the partnership must make super contributions for any eligible workers they employ.

3. Companies

If you operate your business as an incorporated company, the business is a distinct legal entity that is regulated by the Australian Securities and investment Commission.
A company is a more complex business structure. usually, the set-up and administrative costs for a company are higher than for other business structures.

Advantages:

• A company has far greater access to capital for the running of the business.
• A company pays tax on its own profits.
• Shareholders are not liable for the debts of the business.
• Increased asset protection.

Things to consider:

• A company is more expensive to establish.
• The tax reporting requirements for companies are far greater than for sole traders and partnerships.
• Shareholders have little say in the running of the business.

Reporting and paying income tax:

Your company must lodge an annual company tax return to report its income and deductions, and the income tax it is liable to pay. All companies pay their own income tax.
Your company pays tax on its net profit at a flat rate of 30%, which may be an advantage for businesses with high profit levels.

If you receive wages or director’s fees from your company, you need to:

• Include them in your individual tax return
• Pay tax on them at the individuals tax rates.

Paying super:

Your company must make super contributions for any eligible workers it employs, including you as a company director.

4. Trusts

If you operate your business as a trust, you’re:

• A trustee.
• Responsible for holding property or income for the benefit of others (the beneficiaries).

The most common variety of trust is the discretionary trust. If you’re the trustee of a discretionary trust, you have the power to decide how the profit will be distributed among the beneficiaries. 

Advantages:

• A trust has a limited liability if the trust is a company.
• A trust has perpetual existence and does not cease with the death of a beneficiary.
• Increased asset protection.

Things to consider:

• Like a company, a trust is more expensive and potentially complicated to establish.
• It may be more expensive to complete the required tax and administrative paperwork each year.
• Profits distributed to children under 18 may be taxed at higher rates.

Reporting and paying income tax:

Your discretionary trust does not have to pay tax. Instead, the trust beneficiaries pay tax on their share of the trust’s net income.
As a trustee, you can use your discretion each year to decide which beneficiaries will receive income. Trusts can pay very high rates of tax on any profits that are not distributed.

Paying super:

Your trust must make super contributions for any eligible workers it employs. This includes you if you’re employed by the trust.

When returning trust deeds to Shelcom for stamping, you no longer have to send back all four hard copies of the deeds to us via post or courier.

(This procedure pertains to Trust Deeds set up by Shelcom Corporate Services)

Due to changes in stamp duty procedures, we can now accept scanned documents to help ease and speed up the trust deed stamping process.

We will require one copy of a signed trust deed.

Requirements for scanned documents

1. Documents must be scanned from the original document. Scans from a photocopy or a faxed copy are unacceptable.
2. The scanned document must be signed by ALL signatories.
3. Please ensure no portion of the document is missing.
4. Documents must be scanned at the original size.
5. Badly scanned, unreadable documents will require resubmission. This will delay the stamping process.
6. The scanned deed must be saved in a standard readable file format preferably in PDF.
7. Please name the scanned file in the following: NAME_OF_TRUST.
8. Please do not attach compressed files. If the document you are attempting to attach is too large we recommend that you create a PDF document or reduce the file size whilst retaining its readability.
9. The maximum size of the file of document our e-mail will accept is 10MB.
10. Please e-mail the scanned trust deed to companies@shelcom.com.au with the subject line: Trust Deed For Stamping
11. If you are unable to scan the trust deed, we will still accept the hard-copy of the original deed.

If you have any questions regarding the process of trust deed stamping, please do not hesitate to contact us at any time.

When thinking of incorporating  a company, or while doing research about rules and laws, new business owners seldom think about who they will appoint to keep their business in good standing.

In very simple terms, a registered agent or registered agent service is when a person or business (this could be: yourself, an accountant, a lawyer or a corporate service provider) takes on the responsibility of receiving all legal and tax documents and correspondence on behalf of the company.

The typical documents which are sent to the registered agent may include company annual statements, other correspondence from ASIC, and in some cases even documents pertaining to lawsuits and other legal matters.

According to the ASIC website, “a registered agent acts as an intermediary between ASIC and Australian companies, to help companies meet their lodgement obligation under the Corporations Act 2001″. A registered agent does not operate on the behalf of ASIC, instead operates on behalf of the company. A form must be lodged by the company director via the registered agent to ASIC, appointing the registered agent.

When incorporating your company you will be asked to appoint a registered agent as part of your incorporation application and will be asked to provide a valid postal address. PO Boxes are not accepted.
The address is made available to the public, but only through a paid search. If the registered agent changes in future, the previous address will also be available to the public through a paid historical search.

The job of the registered agent is to lodge documents with ASIC and represent the company by reporting company changes and paying annual review fees. A registered agent looks after the annual compliance for a company.

In response to the ASIC’s annual statement for a company, the agent should:

• Check Company Statement;
• Change company details within 28 days (if required, lodge a Form 484);
• Pay Annual Review Fee within 2 months of review date; and
• Pass a Solvency Resolution within 2 months of review date.

It is important for a new company to consider how available they will be to open and follow up on all legal correspondence.  If a company operates during odd hours or there are multiple businesses owned by one individual, keeping on top of compliance can become daunting.  If important mail is not received, company directors may face problems.

Generally, when choosing a registered agent, a company director should look for a stable, reliable agent who will ensure that there are no interruptions or delays and that all documents are lodged on time and all fees are paid by due date.

Martin Murden, the Director of Technical Consulting and SMSF Audits for Partners Superannuation Services, has recently shared with us very valuable information pertaining to insurance and SMSFs. We would like to pass this valuable information further for your benefit.

A Partners Group 2012 audit survey showed that approximately one in three non-pension paying SMSFs held insurance in respect of the fund’s members. This represents a small increase over the previous year.

Insurance cover falls into one of four groups:

• Life
• Total and Permanent Disability
• Income Protection
• Trauma

The increasing number of SMSFs borrowing to acquire property has resulted in more funds insuring members especially if one is critical to ongoing contributions to the fund. For a couple, this would be the key person in their business. If he/she died or became disabled, the business would either cease or be severely damaged. The business, if it has not done so already, needs to assess its needs in case of such an event.

When a SMSF decides to insure a member to enable debt to be repaid, there are differences to the normal provision of insurance cover to boost a member’s balance. In the usual situation, the insurance premium is deducted from the member’s account and the insurance proceeds are added to the member’s balance. This does not help with the repayment of debt unless the beneficiary or the disabled member elect to take benefits in the form of a pension.

A lump sum benefit would require the insurance proceeds to be paid out of the fund. Even if the beneficiary wanted to leave the proceeds in the fund to repay the debt and commence a pension or income stream, he/she may not be able to do so under the fund’s trust deed. Many trust deeds we have sighted in recent years require benefits to be paid by way of a lump sum if the deceased/disabled member was not in receipt of a pension at the time of death or disablement.

In addition to having insurance cover to boost a member’s benefits, funds with debt to be repaid could establish a reserve account to specifically hold insurance cover in the event of death or disablement of one or more members. Each year an amount equal to the premium payable would be placed into the reserve and used specifically for this purpose. There is some documentation required to put such a reserve in place.

A side effect of using such a reserve is it could also enable an anti-detriment payment to be paid upon death with substantial tax benefits being obtained.

From an audit perspective

Some of the problems The Partners audit team see with insurance policies are:

The policy is held in the name of the insured only whereas it should be in the names of all of the individual trustees or the name of the corporate trustee and it should be held in their capacity as trustee for the fund. Changes to legislation that took effect from August 2012 allow the ATO to impose penalties upon the trustee when assets are not correctly held (insurance policies are considered as fund assets); and
The policy belongs to another superannuation fund. In these cases the policy belongs to a superannuation fund operated by the company issuing the insurance policy. Any amounts paid by the SMSF are roll-overs to the second fund and not tax deductible premiums. And in the event of death payment can be delayed for a lengthy period. The trustee of the insurance company fund has to decide who should receive the proceeds and in the event of a dispute between family members, the Superannuation Complaints Tribunal may make the final decision.

Two final important points to be made about insurance and SMSFs:

From July 2011, a tax deduction is only available for total and permanent disablement insurance where the definition of disablement is an “any occupation” definition. If it is different i.e. “own occupation” then only a partial deduction may be claimable; and
From July 2013, it has been proposed super funds will no longer be able to have trauma insurance cover. Generally, most funds we see do not hold trauma insurance due to difficulties in getting the proceeds out if the client is under preservation age.

Newsletter written by Martin Murden
Director, Technical Consulting and SMSF Audits
PARTNERS Superannuation Services Pty Ltd

Director, Technical Consulting and SMSF Audits
PARTNERS Superannuation Services Pty Ltd 

Background

Since 2007, self managed superannuation funds (SMSF’s) have been permitted to borrow to acquire assets. Almost all purchases by a SMSF with borrowings relate to property.

Structure

 It is necessary to first establish a security trust (Security Trust) to hold the property whilst the debt remains and second to have a transfer agreement between the SMSF and the Security trust.  This can be seen in the following diagram:

SMSF

It goes without saying that a SMSF is required.

The Partners Group recommends a corporate trustee for SMSF’s for asset protection reasons, administrative efficiency, continuous succession and estate planning flexibility. Whilst it is not a legislative requirement, lenders have different policies with regards to SMSF trustees and may insist on a corporate trustee.

If there is an existing SMSF, the trust deed governing the SMSF may require updating either because of the changes made since the SMSF was established or because the wording in the deed relating to borrowings is insufficient for the lender.

Security Trust

 A Security Trust is a trust, controlled by the members of the SMSF, that has one purpose and that is to hold the property until the debt has been repaid.

The reason a separate trust is required is because legislation prohibits the SMSF from using any of its assets as security for the debt.   A property held by the Security Trust can be used as security.

Again, the Partners Group recommends a corporate trustee for the Security Trust.  The directors would be the members of the SMSF.

Transfer Agreement

This is an agreement between the SMSF and the Security Trust recognising the Security Trust is holding the property in trust for the SMSF and will transfer the ownership of the property to the SMSF once the loan has been fully repaid.   It is important that the transfer of the property to the SMSF occurs at this point to ensure continued compliance with superannuation legislation.

Purchase a commercial or residential property

The only restriction imposed upon the property being acquired is a SMSF cannot acquire a residential property from a member of the SMSF, a relative of a member or an associated party such as a company owned by the member or a trust in which the member is a beneficiary. It is important note a residential property cannot be used by a member of the fund or a member’s relative.

Limited Recourse Borrowing Arrangement (LRBA)

The only security for a SMSF borrowing is the property itself (limited recourse).  No other assets of the SMSF can be used as security.

The loan can be sourced from a third party lender or a member of the SMSF or an associate, such as a member’s family trust (self financing loan).

A bank will typically require a deposit of up to 30% (residential property) and 35% (commercial property).   The amount of deposit required can be reduced if a self-funding loan is used.

Lenders will require personal guarantees, however these cannot be given in the capacity as a member of the SMSF as the recourse of the lender to the SMSF is limited to the asset in question. If the SMSF defaults on the loan, the personal assets of the guarantors may be called upon to repay the debt.

A self financing loan still needs to be properly documented and it must be on commercial terms.

A loan can be re-financed but only be for the current amount owing on the existing loan plus associated costs.

Financial Advice

Financial advice covers the viability of the strategy including cash flows, tax, contributions and personal risk protection.  In addition the advisor would sign off on the strategy for lending approval.

It is not requirement of law for a financial planner to be involved.   If the loan is to come from a bank however the bank will require evidence that the SMSF has received advice from a financial planner.

The Partners Group recommends that it is prudent to receive financial advice in all situations.

The benefits of borrowing to acquire property

There are two key benefits:

1. a property can be acquired even though the SMSF does not have sufficient cash to purchase the property
2. the SMSF can use gearing to obtain capital growth on the total property value whilst only partially paying for the property.

Common problems sighted

These are some of the issues that may arise:

(i)  applying for the wrong type of loan. Whilst the ability for a SMSF to borrow to buy property has been available for five years, not all mortgage brokers or banks have experience in this area. If the wrong type of loan is used, it may be costly to rectify problems.   And if the property is not held via the Security Trust, it may not be possible to replace the loan with a LRBA;

(ii)  acquiring the property with inadequate funds. Consideration needs to be given to how the loan with be serviced if the property becomes untenanted for a period of time or the tenant fails to pay rent when due;

(iii) forgetting the insurance cover on the lives of the SMSF members. This typically occurs when money is to be transferred from an industry/retail fund into a new SMSF. Replacement insurance cover should be arranged prior to the transfer of money as insurance cover ceases at the time of transfer;

(iv) signing a contract of sale with an early settlement date.  Typically, lenders require a minimum of 60 days from receipt of a loan application to settle the loan;

(v)  not seeking advice before entering into the sale contract, whether that is financial or legal.  For example, LRBA’s may not be suitable where there are plans to improve or develop the property;

(vi) not documenting the transaction properly;

(vii) high degree of variance of experience and understanding between lenders. Each lender and sometimes branches of the same lender has different ‘requirements’ with regards to the LRBA documents and structures.  Where the lender’s requirements are not made clear at the beginning of the transaction, or at the earliest stage possible, there is the real potential for delays to satisfaction of finance conditions and settlement;

(viii) not having the right purchasing entity named in the sale contract.  This is not a huge issue in Victoria but in other states new contracts may have to be entered into or there could be stamp duty implications with regards to nominating a new purchaser;

(ix) not taking an integrated approach with regards to advice from finance brokers, financial planners, lawyers, conveyancers, superannuation advisors.  Often additional time and expense are incurred where advisors are engaged from several different organisations.

Offering from Partners Group

The Partners Group has extensive high level experience in the LRBA space, with the Partners Group having successfully completed hundreds of LRBA’s for clients purchasing both residential and commercial property through their SMSF’s.

Partners has worked with a wide variety of lenders, and has assisted clients in Victoria, New South Wales, Queensland, South Australia, West Australia and Tasmania.

Photo: http://chumcubo.com/

You bake amazing cupcakes that your neighbours love, or you’re the guy your friends come running to for computer advice. You know your business has major potential. You daydream about hiring employees and buying that new car, or maybe even becoming a guru in your industry, but do you know what it takes to get there? You’ll probably start small, alone, just you working from your home office. Great! You think, that’s exactly what I want.

What’s next? First thing’s first! You need to make sure that your home based business is legal and you and your assets are protected.  Here are some simple guidelines on how to safeguard your new home business:

1.       Choose the right Business Name:

Picking the right name for your business is tricky. You want a name that is descriptive yet catch. It has to be memorable.  You should do your research. Search the net for your competitors and analyze their names and slogans.  This can help you get on the right track.  Once you narrow down two or three names, conduct a business name availability search to see if any of the names are up for grabs.  An ASIC business name search will provide you a list of same and similar business names already registered in Australia. Even if the name you want is available to register through ASIC doesn’t me that it isn’t trademarked. Make sure you do a thorough trademark search to ensure you are not infringing on someone’s intellectual property. You may also want to consider trademarking your chosen name for that extra level of protection, although you can wait to do that later when your business takes off.

2.       Choose the right Business Structure:

When you are ready to set up shop, your most important move will be to hire an accountant and a lawyer. Only accountants and lawyers are qualified to give you financial advice as well as guidance on picking the appropriate business structure for your specific circumstances. Just because your friend started his business as a sole trader, does not mean that this will be the right structure for you. You may have a riskier business plan, you may be investing much more money or you may have many more assets to protect.  There is a set of advantages and disadvantages for each available business structure in Australia. You must do your research and speak to qualified consultants before you make a final decision. Choosing the wrong business structure could be a very costly mistake. Once you choose your business structure you will need to register your business with ASIC. Find a provider that you can talk to and trust to take care of the registration.

3.       Select a Registered Agent

Many people working from home do not want their business address (which happens to be their residential address) to be made available to the public. Some people think it is a safety matter; others simply do not want their clients knowing that they work from home. Unfortunately, ASIC require that you provide a physical business address which is then made available on the business register. Because PO Box addresses are not accepted, most often new business owners will nominate their accountants address as their registered address. Alternatively, in the case of a Company Incorporation, a corporate service provider can serve as the registered agent.

4.       Permits and Insurance

Just like for your health your life or your travel, you should have business insurance. Finding an insurance policy appropriate for your needs can be tricky. It’s important to understand that policies are different and cover different needs. Make sure that when comparing policies you compare the features and benefits and that you’re not just focused on the price. With so many policies to choose from, it’s imperative that before you buy a policy, you consult with your lawyer and make sure they approve.  Also equally as important is obtaining all the necessary permits and business licenses that you may need.  For example, if you are baking cakes, you may have to undergo a health inspection.  The Australian Business Licence and Information Service (ABLIS) helps you find the government licences, permits, approvals, registrations, codes of practice, standards and guidelines you need to know about to meet your compliance responsibilities. Make sure you do this at the start. If you wait too long, it may be too late. Penalties for not complying with the law can be hefty.

Will you be starting a home based business this year?  Do you have any additional advice? Please share with us what you know so that we can all benefit!

This topic is our most popular blog post and the most frequently asked question.  Our last post on the subject is a bit outdated, so I thought I would revisit the topic.

It is very typical that when speaking colloquially the words business and company are used interchangeably and it is not entirely incorrect. A company is in fact a business and a business can be a company.

In the official business structure world however, the two are very different.  A business and a company are very dissimilar in the way that they are structured financially and legally.

The basics of a business

A business is usually a great starting point for a new small to medium size venture.

The cost of setting up a business is relatively low as all you need is an Australian Business Number or A.B.N. for which you can apply for free through the www.abr.gov.au website.

If you would like to register your business with the Australian government you can do so for $30 for one year or $80 for three years. (These are the prices if you apply directly through the  Australian Securities & Investments Commission)  To register your business with ASIC you will need your A.B.N and a name for your business, along with a postal address and a physical business address.

Generally there are two types of businesses: Sole Trader or Partnership.

A sole trader does not have to register a business name with ASIC if they trade under their own name, however they must apply for an A.B.N.  Also, if the proprietors name changes, the business must be registered with ASIC.

A partnership can comprise of two or more individuals or entities, and a formal partnership agreement should be put in place.

Legally and financially a business and the proprietor are not separate from one another.  The money the business earns is income that needs to be claimed on the proprietor’s personal tax return. Tax-wise, in the eyes of the ATO you are seen as an individual, which means you are privy to the $18,200 tax free threshold and the individual tax threshold rates.

The proprietor of a business is solely (or together with a partner or partners) responsible for any debts the business suffers. If the business has bad debt, creditors are within their legal rights to repossess the proprietor’s personal belongings and private assets.

Remember, you can always restructure your business down the line as it grows. You can go from running a business as a sole trader to running a company as a director in the future if need be.

The basics of a company

A company is a much more complex and expensive structure and is often favoured by medium to large enterprises, or by proprietors who need asset and liability protection.

A company structure set up costs around the $600-$700 mark, and it is advised that an accountant, lawyer, financial planner or corporate service provider is involved in the entire process from general business advice to the compilation and filing of paper work.  An expert should be involved to ensure that the structure fits the circumstances and that everything is completed correctly and in compliance with the law.  There are also mandatory annual fees, which must be paid to ASIC on the anniversary of company incorporation. Today, the fee is $230, but this is subject to change at ASIC’s discretion.

Legally and financially a company is a separate entity from the proprietor.  If a company is set up with a limited liability structure and it goes into debt, the debt remains the responsibility of the company, which means that the proprietor’s personal assets are secure.  Keep in mind that this does not mean that company directors are not accountable if they violate the law.

Incorporated companies have shareholders which enables the company to raise funds more easily.  Companies are also taxed differently to individuals and pay a flat tax rate of only 30%, yet they don’t get the tax free threshold privileges.

A company must meet many regulatory standards and government directives. It must report and disclose information about itself on a regular basis.  ASIC ensures that companies are meeting their obligations under the Corporations ACT 2001.

You can read more about company compliance here.

Have more questions? Still unsure? Ask us and we will do our best to help!