There are a number of things to think about when setting up a business - including the objectives of the business and the business structure that will best support those objectives.
It is important that you choose the right business structure for you - this may be a company, sole trader, partnership or a trustee of a trust.
Choosing the right structure for your business is essential. The right structure can deliver you the best asset protection, the best tax outcomes and the best options for raising capital and managing succession. Getting it wrong means it is often costly to fix the issues later.
Getting it right the first time will ensure that you (among other things) don't unnecessarily expend resources on establishing a structure that is not right for you and will minimise the risk of unintended consequences (including tax consequences).
There are a number of different business structures, including the following:
A company is a separate legal entity, which requires registration with the Australian Securities and Investments Commission (ASIC). A company has the same rights as a natural person. This means that it can do anything that a natural person can do, including entering into contracts, and incurring debt. It can also sue and be sued. Companies are owned by shareholders (sometimes referred to as members). These shareholders can include natural persons, other companies and trustees. Shareholders can limit their personal liability up to the value of their shares and are generally not liable for company debts (unless they provide personal guarantees to borrow money). Companies are taxed at a different rate to individuals. The full current corporate tax rate is 30% (but a lower base rate entity tax rate may apply in some circumstances).
A sole trader is the simplest business structure. It involves a natural person being responsible for all aspects of the business. For example, the sole trader can, in their own name, enter into contracts and incur debt.
Because of this there are no limits on a sole trader’s personal liability to their business – and the sole trader may sue, and be sued, in their own name.
A sole trader does not need to register their business with ASIC unless they are conducting business under a name other than their personal name.
A partnership is two or more people or entities who do business as partners or receive income jointly.
In a partnership, control or management of the business is shared between the partners. A partnership is not a separate legal entity. This means that all of the partners will be liable for the debts and obligations of the partnership and its business. To govern the formal terms of a partnership – such as decision-making and transfers or sales of a partnership interest – a partnership agreement is often entered into. The partners may, for administrative convenience, also appoint a manager to act (as the name suggests) as the manager of the partnership.
A trust is an arrangement whereby a person (this may be a natural person or a company), the trustee, agrees to hold property or assets (e.g. business assets) for the benefit of others (known as beneficiaries). The trustee will be the legal owner of the property or assets, however, the trust (for which the trustee is acting) will hold the beneficial ownership. This means that the trustee will need to enter into contracts, incur debt, etc on behalf of the trust.
To set up a trust, a formal deed will need to be entered into (often between the trustee, a settlor and appointors (if applicable). Using a trust structure for your business may have tax advantages.
See how the advantages and disadvantages of a company structure compare with a sole trader structure, for example, in the table below.
|How decisions are made||
The Corporations Act 2001 (Cth) (Corporations Act) sets out how a company is to make decisions. Most of a company's decisions are made by the company's directors. However, some decisions are decided by the company's shareholders.
Sole traders alone make all decisions about their business.
Limiting liability is one of the primary advantages of operating a business through a limited company. A 'Pty Ltd' company is a 'limited' company.
Shareholders With a 'Pty Ltd' company, the liability of the company's shareholders is limited to the amount of unpaid capital on the shares they own - so if the shareholders owe nothing on their shares, then their liability (as a shareholder) is zero. This means if the shareholders have paid the amount owing on their shares, and the company defaults on a debt, then a creditor of the company cannot recover the debt from the shareholders. For example, if a company has two shareholders, each owning one share that was issued at $1.00 each and the shareholders have each paid the $1.00, then the creditor can get nothing from the shareholders.
Directors Generally, if a company defaults on a debt, then a creditor of the company cannot recover a debt from the directors.
However, there are some circumstances in which directors of a company may be personally liable – for example, if the directors allowed the company to continue trading after it became insolvent then a director may be personally liable.
Unlike ‘Pty Ltd’ companies, sole traders, will be personally liable for the debts and obligations of their business (and for an uncapped amount).
|Security for loans||
Loans to a company can be secured only by the company's assets (and not the personal assets of the directors, for example).
However, directors will often be asked to provide a personal guarantee and indemnity (and this can be secured by a charge or mortgage over the directors’ personal assets). The guarantee and indemnity provided may be limited or unlimited depending on the circumstances and what can be negotiated with the lender/third party.
Loans to a sole trader may be secured by charges or mortgages granted over the sole trader’s personal assets.
|Investment and capital raising||
A company can encourage investment in the company by offering shares in the company to third parties.
Raising capital is regulated under the Corporations Act. There are only limited exceptions for small raisings. This is not a ‘disadvantage’, as such, because the law regulates all types of capital raising, not just in relation to companies.
Sole traders wishing to grow their business with additional capital need either:
A company pays tax at the corporate rate, which is currently 30%, or 25% for small and medium companies (current as at July 2022).
When a shareholder invests in a company, they cannot claim the investment as a deduction against their assessable income.
Sole traders pay tax depending on their personal marginal tax rate – which may be greater than the corporate tax rate. This is because income derived through a business operated by a sole trader is assessable income in the hands of the sole trader.
A company must prepare financial accounts and submit a tax return.
A sole trader must prepare and submit a personal tax return.
Generally, in any given year a company can decide to retain profits rather than distribute them to shareholders. The retained profits are taxed as income of the company. The company can then use the retained profits to grow the business.
Sole traders cannot ‘retain profits’. In the hands of the sole trader, profits are income which is taxed at the sole trader's personal marginal rate. Unutilised after tax profits simply constitute personal savings for future business needs, or personal investment.
A company that runs more than one business can offset losses from one business against sources of income in other businesses.
Similarly, a company in the same consolidated tax group as other companies can offset losses and other sources of income when submitting the group's return.
Sole traders may be able to either
Further information can be found here.
|Carried forward losses||
A company can carry forward tax losses into future years, subject to special ownership and business continuity rules. Further information regarding tax losses and carrying forward losses can be found here.
Consumers transacting with a company are protected under Commonwealth legislation, primarily the Competition and Consumer Act.
Consumers transacting with sole traders are protected under state and territory fair trading laws.
|Registration and fees||
There are a number of costs associated with a company, including an ASIC registration fee and an ASIC annual review fee.
If the company is to engage in certain types of activities, then the company must pay licence fees (e.g. a liquor licence) and those licence fees are often more expensive for a company than for a sole trader, for example.
Sole traders do not have to pay ASIC fees because, for example, they are not required to be registered with ASIC.
If the sole trader is to engage in certain types of activities, then the sole trader must pay licence fees (e.g. a liquor licence) and those licence fees are often less expensive for a sole trader than for a company.
|Regulated by specific legislation||
Companies are regulated by Commonwealth legislation, the Corporations Act. A company is governed by a Constitution, the Replaceable Rules contained in the Corporations Act, or a combination of both.
There are complex requirements for companies (and their officeholders) under the Corporations Act. Companies, officeholders and members should be aware of these requirements.
Sole traders are not governed by specific legislation. They are governed by general laws.
A company enjoys 'perpetual succession' - that is, a company is a distinct legal entity and so can survive the death of all of its members and directors (with share ownership being dealt with under the deceased shareholder's will).
A business operated by a sole trader does not enjoy ‘perpetual succession’. Instead, the assets of the business may be dealt with under the sole trader's estate plan.
A 'Pty Ltd' company is a business structure that has at least one shareholder and no more than 50 non-employee shareholders.
The liability of shareholders in a 'Pty Ltd' company is limited to the value of their shares.
A 'Pty Ltd' is a private company.
Companies do add a layer of complexity and cost to operating a business or making an investment. For example, there are additional annual tasks (ASIC filings and fees, etc.). These factors should be taken into consideration before deciding whether to establish a company.
Furthermore, there are different types of companies that can be established. Accordingly, we recommend that you seek advice as to the type of company that will best suit your objectives.
For example, you may choose to establish one of the following types of companies:
The ASIC fee for registering a company varies depending on the type of company that you register. ASIC outlines it current fees for starting a company here.
These documents generally include resolutions required to establish the company, consents to become a member/officer and a constitution (but will vary depending on which Cleardocs product you order).
For example, if you order the Small Business Bundle, you will receive standard company set up documents (as outlined above), as well as documents required for ABN / TFN / GST / business name registrations, a standard employment contract and a minutes template for the allotment of shares.
It will take you approximately 20 minutes to complete the interface questions required to register a company using its Cleardocs Company Registration.
You will need to have the following information handy when setting up a company:
A shareholders' agreement is a binding agreement between the shareholders of a company. A shareholders' agreement governs (among other things) the relationship between the shareholders, who controls the company, how the company will be owned and managed and how shareholders can sell their shares and exit the company. A shareholders' agreement operates together with a 'Pty Ltd' company's constitution.
Yes, all registered companies will receive an ACN from ASIC upon registration.
You will be issued with an ACN once your application for registration of a new company has been accepted and processed by ASIC. The ACN will appear on the certificate of incorporation issued by ASIC.
As defined earlier, ASIC is the 'Australian Securities and Investments Commission'.
ASIC is an independent Australian government body. It is set up under, and administers, the Australian Securities and Investments Commission Act 2001.
ASIC carries out most of its work under the Corporations Act.
ASIC regulates the conduct of Australian companies, financial markets, financial services organisations (including banks, life and general insurers and superannuation funds) and professionals who deal in and advise on investments, superannuation, insurance, deposit-taking and credit. ASIC is also responsible for authorisations to operate in industries it regulates.
ASIC is responsible for enforcing a lot of the provisions of the Corporations Act (which is the key piece of legislation governing Australian companies).
An 'Australian Business Number' (ABN) is a unique 11 digit number that identifies your business or organisation to the government and community. It is issued to all entities registered in the Australian Business Register.
An ABN can have a status of active or cancelled. A status of cancelled means the business has ceased trading.
It is compulsory for businesses with a GST turnover of $75,000 or more to have an ABN and be registered for GST (see below). If a business has a GST turnover of less than $75,000, the business can still apply for an ABN and may choose to register for GST once they have an ABN. You should speak with your account regarding the need for you to apply for an ABN (and register for GST).
If you need to apply for an ABN, or would like to apply for an ABN, you can quickly and easy do this via Cleardocs using the ABN Registration Product. Alternatively, you can apply for an ABN directly via the Australian Business Registry (ABR).
An ABN is a business number that can be issued to all entities including sole traders, partnerships and companies. An ABN is issued by the Australian Tax Office (ATO).
In contrast, an ACN is only issued to companies. An ACN is issued by ASIC.
An 'Australian Registered Body Number' (ARBN) is a unique, nine-digit number allocated by ASIC when a body is registered with them other than as a company, for example, foreign companies and registrable Australian bodies.
A body that has been issued with an ARBN can also apply for an ABN.
A company name is required in order to register a company.
A company name is available unless the name is:
If your preferred company name is taken, you can try similar adaptations of that name - as ASIC will accept company names that are similar (just not identical).
However, although a name may be available, a company or a person with a similar name may bring a claim of unfair competition or 'passing off' against your company. You should seek advice as to how to protect against this possibility.
Generally, you will need to register a business name if you carry on business within Australia.
However, there are exceptions to this - including, if you are an already registered Australian company and your operating name is the same as your company name.
You can apply for a business name online via the Australian Government Business Registration Services' website.
The current fees for registering a business name are (current as at July 2023):
A constitution is a contract between:
A company can adopt a constitution before or after registration. If it is adopted before registration, each member must agree (in writing) to the terms of the constitution. If a constitution is adopted after registration, the company must pass a special resolution to adopt the constitution.
Replaceable rules are a basic set of rules that can be used for managing your company, if you do not want to have a constitution. The replaceable rules are set out in the Corporations Act.
If a company wants to change or remove a replaceable rule, they will need to have a constitution that outlines the changes.
It is worth noting that replaceable rules do not apply to a 'Pty Ltd' company if the same person is the sole director as well as the sole shareholder.
A company's internal affairs can be governed by replaceable rules, a constitution or both. You may choose to use the replaceable rules if you do not want the hassle (or cost) of preparing a tailored constitution for your company.
You may choose to create a constitution for a number of reasons - including if:
This will depend on where your company is registered.
The registered office is where correspondence relating to the company will be delivered to the company. The principal place of address is where the business primarily undertakes its business.
Your company will need a registered office address and principal place of business address because ASIC requires that information.
A registered office and principal place of business can be the same address.
If your registered office or principal place of business address is your residential address, you may use that address.
It is worth noting that the addresses used will be shown on a company search for your company - and anyone may conduct a company search of your company.
An ultimate holding company is a company that has overall control of another company. If all, or the majority, of the shares in your company are, or will be, held by another company, you may have an ultimate holding company.
An ultimate holding company might be used for a number of reasons - including for asset protection and risk minimisation. Seek advice as to whether an ultimate holding company structure is appropriate for you.
If your company has an ultimate holding company, you will need to provide that company's name, ACN/ARBN/ABN and its country of incorporation (if not Australia) when registering a company in which the ultimate holding company will hold the majority of shares.
An ultimate holding company can be registered in the same way as any other company.
Your company must have at least one director.
Your company does not need a company secretary. However, if your company will have only one director, then having a secretary may make it easier for the company to sign documents in a way that is acceptable to banks.
Your company must also have one public officer (no more, and no less).
Directors are responsible for guiding and monitoring the management of a company.
Directors must be at least 18 years of age.
Your company must have at least one director who ordinarily resides in Australia.
The directors of your company must provide their written consent to act as director before your company is registered (and before being appointed a director). A personalised consent form for each director is provided as part of Cleardocs Company Registration.
Directors are subject to a number of substantive duties under the Corporations Act (as well as under general law). The Corporations Act sets out a number of the more important duties of directors, including:
A company secretary must be at least 18 years of age.
There is no limit to the number of company secretaries a company may have - but it makes sense to only have one.
If your company has:
The person consenting to being appointed as company secretary must provide the company with a signed consent to act as secretary of the company before being appointed. A personalised consent form for each secretary in Cleardocs Company Registration.
The company secretary has a number of administrative obligations under the Corporations Act, including the responsibility for ensuring that the company:
As noted above, having a company secretary is optional. If you do not appoint a company secretary, your company's director(s) must meet these administrative obligations.
As a company secretary is an officer of the company, he or she is also subject to the requirements of company officers under the Corporations Act.
Your company must have one public officer (no more, and no less) who resides in Australia and is at least 18 years of age.
A public officer must be appointed within three months after your company commences to carry on business or derive income in Australia. The documents to take care of this are provided in Cleardocs Company Registration. One of the documents is a letter from the public officer to the ATO. When the company is registered, the public officer needs to send that letter to the ATO (not ASIC).
The public officer is answerable for the doing of all things as are required to be done by the company under the Income Tax Assessment Act 1936 or the relevant regulations. The public officer's role is therefore more relevant to the ATO than ASIC.
Generally, the following details are required of office holders; full name, any former names, date of birth, place of birth, residential address and appointment date.
A recent change in the law also requires directors to hold a 'Director Identification Number' (DIN).
A DIN is a unique identifier that directors will keep forever (kind of like a driver's licence number). It is intended to help to prevent the use of false or fraudulent director identities.
Each director must apply for their own DIN - this will be a one-off application. The fastest way to apply is online using the myGovID app. For more information about DINs and the application process,visit Australian Business Registry Services (ABRS).
Yes - the process to be followed will usually depend on your company's constitution (or the replaceable rules, if your company has not adopted a constitution). The process would likely involve a resolution of the company (or its members, or both), a consent from the incoming director and preparation and lodgement of the necessary ASIC form.
The share structure is up to you - you can issue the number and type of shares that suits your purposes. You should seek advice in relation to your intended share structure before you set up your company.
A company must not have more than 50 non-employee shareholders.
There is no restriction on the number of shares that may be issued. However, it may be a good idea to issue 12 shares when the company is registered. This usually makes it easier to transfer shares to new or existing shareholders without having to continually alter the company's share capital. You should seek advice regarding this before deciding on the number of shares in the initial share capital for your company.
By way of example, you can read about the rights that attach to the different classes of shares offered by Cleardocs by viewing Schedule 1 of Cleardocs' sample constitution.
Yes - the process to be followed will usually depend on the company's constitution (or the replaceable rules, if your company has not adopted a constitution and likely involve (among other things) a resolution of the company (or its members, or both), a consent from the incoming member and preparation and lodgement of the necessary ASIC form.
A shareholder may be a natural person, a company, a trustee on behalf of a trust or a body politic (e.g. State of Queensland).
Generally, you must register for GST when your business or enterprise has a GST turnover (gross income from all businesses minus GST) of $75,000 or more - see Working out your GST turnover - or when you start a new business and expect your turnover to reach the GST threshold (or more) in the first year of operation.
Registering for GST is optional if your business or enterprise doesn't fit into one of these categories. If you choose to register for GST, generally you must stay registered for at least 12 months.
If you don't register for GST and are required to, you may have to pay GST on sales made since the date you were required to register. This could happen even if you didn't include GST in the price of those sales.
You may also have to pay penalties and interest.
Before you register for standard GST, you need to have an ABN. You can get an ABN when you first register your business name or at a later time.
Once you have an ABN, you can register for GST through a registered tax agent or BAS agent or via the ATO.
All companies must keep some form of written financial records that record and explain their financial position and performance, and enable accurate financial statements to be prepared and audited.
You must keep detailed records for all transactions related to your tax and superannuation affairs as you start, run, sell, change or close your business. The ATO's detailed requirements regarding record keeping can be accessed here .
Section 286 of the Corporations Act requires financial records to be kept for at least 7 years after the transactions covered by the records are complete.
The ATO requires that you keep most records for 5 years, starting from when you prepared or obtained the records, or completed the transactions, whichever is later.
We therefore recommend that you keep records for at least 7 years.
You can keep records electronically or in paper form.
If you keep your records electronically, there's no need to also keep paper copies unless a particular law or regulation requires a paper copy.
You can also store and keep paper records electronically. The ATO accepts images of business paper records saved on an electronic storage medium, provided the electronic copies are a true and clear reproduction of the original paper records and meet their record-keeping requirements. Once you have saved an image of your original paper records, you don't have to keep the paper versions.
However, if you enter information (for example, supplier information, date, amount and GST) from digital or paper records into your accounting software, you still need to keep a copy of the actual record, either digitally or on paper.
Further information can be found here.
Your ASIC proprietary limited ACN registration and 14 company set up documents essential for legal compliance and good governance.
Register your company and business name and receive all necessary documents to start your small business.
Protect your business, ensure clarity for shareholder relationships that enables dispute resolution mechanisms.
Reserve your company name with ASIC electronically through Cleardocs. You can reserve a name for a proprietary limited company or a public company limited by guarantee.
Use Cleardocs to apply for a new ABN and TFN and/or register for GST for your Australian for-profit company owned by Australian resident.
Use Cleardocs to create a range of Minutes and Resolutions for administration of a proprietary limited company.