Before You Start Your Business
Once you have had that ‘light bulb moment’ and come up with that brilliant idea for your new business you want to get started in a hurry. However, before you make any big financial commitment you want to make sure the concept has ‘legs’. As a consequence a lot of people elect to establish their business under their own name or a business name rather than a company or trust structure. It is the cheapest option, however, there are a number of key considerations when deciding on the best structure for a business.
While it's a relatively simple process to register your business name with ASIC, from a legal and financial perspective there is a big difference between starting out under a business name and structuring your business as a company. There is a multitude of different options when it comes to business structures including sole trader, company, trust and partnership. Whenever we provide advice on alternate business structures we always look at other considerations including asset protection, the potential to admit new partners and eligibility for discount capital gains tax concessions. This is probably not the best forum to get too technical so let’s just look at the major distinction between trading under a business name and operating as a company.
Firstly, the set up costs are a lot lower to just register a business name. The business names register is now a national system and you can register the name for one year for $33 or $76 for three years. In the past you were required to register the business name in each state where you planned to do business which was costly and time consuming. Now you only need to register once to be registered in all states and territories of Australia. You can register a business by clicking here.
While this sounds very simple you need to understand that it doesn’t necessarily give you exclusive rights to the business name. Registering a business name with ASIC lets you trade under that name but someone else could come along and demand you change your business name if they have trademarked the name before you and you are conducting a similar type of business.
An incorporated company will certainly cost more to register and run compared to just trading under a business name. A company is regarded as a separate person or legal entity distinct from the business owner and can sue and be sued. This structure provides another layer of asset protection in the event of the business failing. This is a key consideration particularly in high risk industries like the building trades and manufacturing. With a business name you don’t get this protection because you are the legal entity that simply trades under a registered name. It is not a separate legal entity and if something goes wrong your personal assets are on the line with creditors potentially chasing you and your assets for their money.
A company structure means the creditors are restricted to the assets of the company. This means your home is safe (unless you have lodged it as a guarantee for a company loan). As a Company Director, you can still be liable and accountable for breaches of the law but generally speaking, your personal assets are safe from creditors. In terms of protection there are two steps you can take:
1. Protect your business name and brand because it can be one of your most valuable assets. Don’t think that because you have registered your company name or business name with ASIC that it is protected against others using it for similar businesses. For ultimate protection you need to consider registering the name as a ‘trademark’ with IP Australia. Click here for more details on the trademark process.
2. Protect your business with strong Terms and Conditions that can be listed on your website or attached to your quotes and contracts. These can provide some protection for your business to limit your liability. A word of warning, don't take short cuts and just copy them from another website or write them yourself. Consult with a solicitor or there are plenty of online templates that could prove invaluable down the track.
3. Insurance is designed to protect you from financial loss through things like accidents, stock damage, fire, theft and flood. We often talk through these options with clients starting a business and we urge you to do the same. Forewarned is forearmed and before you make your first sale they need to be in place.
In summary, starting a business is a bit like a game of chess. You need to make the right opening moves to be successful. Your business structure and asset protection must be a priority and if you’re looking to start a business talk to us today. We’ll help you navigate your way through the start-up maze of structures, registrations, asset protection, insurances and accounting software.