What do I need to think about when setting up a business?
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.
Choosing the right business structure
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).
What are the different types of business structures?
There are a number of different business structures, including the following:
Company
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).
Sole trader
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.
Partnership
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.
Trustee of a trust
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.
What are the advantages and disadvantages of a company structure?
See how the advantages and disadvantages of a company structure compare with a sole trader structure, for example, in the table below.
| Company | Sole trader | |
|---|---|---|
| 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. |
| Liability | 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:
|
| Tax treatment | 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. |
| Tax returns | A company must prepare financial accounts and submit a tax return. |
A sole trader must prepare and submit a personal tax return. |
| Retain profits |
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. |
| Tax losses |
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. |
As above |
| Consumer protection | 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. |
| Succession | 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. |
What are the different types of companies I can set up?
What is a 'Pty Ltd' company?
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.
Is a 'Pty Ltd' a public or private company?
A 'Pty Ltd' is a private company.
What other advice might I need before making a decision to establish a 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:
- Not For Profit Pty Ltd - a company that pursues certain charitable purposes only.
- Special Purpose Company - a company which, like its name suggests, is set-up for a particular purpose. A special purpose company might be set-up solely to be the trustee of an SMSF. Or it might be set-up solely to pursue certain charitable purposes. Further information about special purpose companies can be found in the Frequently Asked Legal Questions(FALQ) section for Cleardocs Company Registration; or
- Public Company Limited by Guarantee - an unlisted public company that cannot pay dividends and is therefore often used by not-for-profit organisations.
How to register a company online
How much does it cost to register a company?
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.
What types of companies can Cleardocs help me set up?
Cleardocs can help set up standard 'Pty Ltd' companies, not for profit 'Pty Ltd' companies and public companies limited by guarantee.
What documents will I receive when I set up a Company on Cleardocs?
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.
How long does it take to register a company?
It will take you approximately 20 minutes to complete the interface questions required to register a company using its Cleardocs Company Registration.
What other details do I need to provide to set up my company?
You will need to have the following information handy when setting up a company:
- company name;
- registered office address;
- principal place of business address;
- company officeholders' details - namely, director(s), public officer, company secretary (optional) - including full name, any former names, residential address, date of birth, place of birth, appointment date and director identification number (for directors);
- shareholder details - including full name, ACN, address and trust details (as applicable);
- number and type of shares to be issued to each shareholder; and
- jurisdiction of the company (for example, will it be registered in Victoria?).
What is a shareholders' agreement?
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.
What is an ACN?
An ACN is a 9 digit number allocated by the Australian Securities and Investments Commission (ASIC) when a body becomes registered as a company under the Corporations Act.
Does a company need an ACN?
Yes, all registered companies will receive an ACN from ASIC upon registration.
How to get an ACN
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.
What is 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.
What does ASIC do?
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).
What is an ABN?
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).
How do I get an ABN number?
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).
What is the difference between an ABN and ACN?
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.
What is an ARBN?
ARBN vs ABN
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.
How to choose a company / business name
How to check if a company name is taken?
A company name is required in order to register a company.
Cleardocs offers a free company name search you can use to see if a company name is available or already taken. This search is also available on ASIC's website here.
If you would like to reserve a company name, you will need to prepare and lodge an ASIC Form 401 with ASIC - you can do so via Cleardocs using the Company Name Reservation Product.
What to do if your company name is taken?
A company name is available unless the name is:
- identical to a name that is reserved or registered under the Corporations Act for another body;
- identical to a name that is included on the national business names register in respect of another individual or body who is not the person applying to have the name; or
- unacceptable for registration under the regulations - for example, if it is restricted (like "ANZAC") or inappropriate.
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.
Do you have to register a business name?
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.
How do I register a business name?
You can apply for a business name online via the Australian Government Business Registration Services' website.
How much does it cost to register a business name?
The current fees for registering a business name are (current as at July 2023):
- $42 for one year; or
- $98 for three years.
How will my Company be governed?
What is a company constitution?
A constitution is a contract between:
- the company and each member;
- the company and each director;
- the company and the company secretary; and
- a member and each other member.
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.
What are replaceable rules?
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.
Why would I choose to use the replaceable rules rather than a constitution?
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.
Why would I choose to create a company constitution over the replaceable rules?
You may choose to create a constitution for a number of reasons - including if:
- you would like a specific set of rules to govern the internal affairs of your company - as opposed to a basic set of rules (such as the replaceable rules). As the replaceable rules are intended to apply to companies that do not have a constitution they are brief and general in nature. You may prefer to have a bespoke set of rules that are tailored to your company;
- you would like to ensure that the rules governing your company cover all aspects of a company's management; and/or
- you would prefer to avoid having to refer to the most current version of the Corporations Act to identify the replaceable rules that apply - as the replaceable rules will change if the relevant legislation changes, it is important that the most current version of the Corporations Act is referred to.
What jurisdiction will govern my company?
This will depend on where your company is registered.
Why do I need to register an office address and a principal place of business address?
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.
Can I use my residential address for business?
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.
What is an ultimate holding company and why is this important?
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.
How do I register an ultimate holding company?
An ultimate holding company can be registered in the same way as any other company.
What officeholders do I need?
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).
What is a director of a company and what are the obligations of a director?
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:
- to act in good faith;
- to not improperly use their position;
- to not improperly use information that they have obtained by virtue of being an officer of the company;
- to act in the best interests of the company;
- to avoid conflicts between the interests of the company and the director's interests;
- to act honestly;
- to exercise care and diligence;
- to prevent the company trading while it is unable to pay its debts; and
- if the company is being wound-up, to report to the liquidator on the affairs of the company and to help the liquidator (by, for example, giving to a liquidator any records of the company that the director has).
What is a company secretary and what are the obligations of a company secretary?
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:
- one company secretary, then he or she must ordinarily reside in Australia; or
- more than one secretary, then at least one of them must ordinarily reside in Australia.
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:
- notifies ASIC about changes to the identities, names and addresses of the company's directors and company secretaries;
- notifies ASIC about changes to the register of members;
- notifies ASIC about changes to any ultimate holding company; and
- responds, if necessary, to an extract of particulars or any return of particulars that it receives.
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.
What is a public officer of a company and what are the obligations of a public officer?
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.
What details do I need to provide in respect to the officeholders?
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).
What is a 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.
How to apply for a DIN?
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).
Can I add more directors in the future?
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.
What share structure should I implement?
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.
What types of shares can the company issue and how many shares should it have on issue?
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.
Can I issue more shares in the future?
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.
Who can be a shareholder in the company?
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).
Do I need to register for GST?
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.
Why register for GST?
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.
How to register a business for GST?
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.
What records do I need to keep?
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.
Keeping business records for tax purposes
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 .
How long do businesses have to keep tax records?
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.
ATO requirements for keeping tax records electronically
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.