10 steps you need to take to set up a small business

February 8, 2023

Get your ducks in a row before you start

Are you thinking of starting a business for the first time and not sure where to go from here?

A business and marketing plan are an important step in discovering the potential scope of your new business idea. But following these, there are also 10 essential steps to setting up the finance and admin part of your business. Whether you are a sole trader, a partnership, a company or a trust, these steps will help you get your ducks lined up and ready to go as your revenue grows.

Step 1: Choose a business structure

What business structure do you need? A sole trader, partnership, company or company trust?

Sole trader – is an individual that works for themselves. We often suggest that people start their business as a sole trader because it is relatively inexpensive and easier to get up and running.

Partnership – if there are two or more people involved such as a husband and wife team or two friends, then you need a partnership agreement. These can be purchased at a reasonable cost, and we can help you source the right agreement and put it into place before you start.

It’s important to note that sole traders and partnerships have more personal liability. Your personal assets are exposed if anything goes wrong with the service or product you provide. In a partnership, both people are exposed to liability regardless of who may have been the cause of an unhappy customer.

Company – this is a PTY LTD structure and although they are more expensive to set up, they limit your liability and protect your personal assets. Companies must be registered through ASIC with a unique identifier and a company name.

The company provides a degree of protection. Shareholders cannot be sued and the company itself is liable only up to the value of its assets. This is provided that the director (the shareholder) has acted in accordance with the Corporations Act. This means that as a company director, you are responsible for staying up to date and across all operations, staff requirements and workplace safety.

Trading trust – a discretionary trust or a unit trust offers further protection than a company. A trustee company (also known as corporate trustee) is appointed whose purpose is to operate the trust. If anything goes wrong, the company is liable and not the trust because the trustee company has no assets. The trust assets are otherwise protected. Trusts cost a little more than companies to establish namely due to the preparation of a trust deed that is required to be stamped in most states of Australia.

We recommend that the trading company or trading trust does not buy any large assets and that another entity is set up to protect the trust.

Step 2: Choose an accounting package for your business

This is an important decision as there are many out there and you want to choose one that is right for your business. You’ll have heard names such as MYOB, Xero, Quickbooks and others. Our experienced accountants at Colledges can advise the best package and the features that your business will need. We have helped many businesses choose their accounting package.

For example, if you are a retailer, you may need inventory control. If you employ staff, then payroll with STP capability would be the desired feature. Whether your business provides a fee for service, if you’re a tradie or you sell goods, then we can assist with the correct accounting software.

We recommend setting up an accounting package from the very start to keep track of income, invoices, tax and expenses. They are now all online and are mostly subscription based which makes it easier to send information to Colledges. We can assist you to choose the best package that can scale up with you as your business grows.

The benefit of having an accounting system from the start is that it takes care of your GST immediately to help prepare BAS statements. You must have and keep all your documentation. These accounting systems allow you to do this very easily and efficiently. They allow uploading invoices and other documents, and they link to your bank accounts for easier reconciliation.

Don’t underestimate the assistance of a good bookkeeper. At Colledges we have a panel of bookkeepers to assist you in this important aspect of being in business.

Step 3: Set up a Tax File Number (TFN), Australian Business Number (ABN) and possibly an Australian Company Number (ACN)

Every business needs a TFN and an ABN which Colledges will apply for at the time of establishing the structure.

The TFN is a unique identifier required by each business (or person) to identify them with the ATO. Note that sole traders would use their current personal TFN and do not need a new TFN when operating as a sole trader.

The ABN is required for all businesses whether a sole trader, partnership, trust or company, and at Colledges we can complete this application for you. At this point, information about GST, PAYG and other statutory obligations are also required to be submitted. This includes the type of business you are planning to set up, your potential income, whether it is above or below $75K for GST purposes, and whether you have employees.

Businesses are generally ongoing and dynamic. For example, initially you may not have employees, so there is no need to submit that information at the time of establishment. However, as your business grows, the registration will need to be updated. It’s straight forward but let us know if you need help. As a client of Colledges, we will update the registrations as needed.

ACN – this is only required for companies and is allocated by ASIC at the time the company is set up.

Prior to establishing the company, you will need to choose the directors. They will need to apply for a Director’s ID as part of the set up process.

Individuals must apply for the Director ID themselves. Our step by step guide is a useful resource. Refer to the article below about how to apply for a Director ID’s.

How to apply for your Director’s ID

How to apply for your Director’s ID – you have until November 30, 2022

Step 4: Set up business bank accounts

Once you have set up the company and obtained your TFN, ABN and ACN, you can go to the bank to set up your bank accounts. It is important to have separate business and personal bank accounts regardless of what sort of business structure you choose. Although you may think this is more relevant to a company or trust, it is also relevant for a sole trader. If you use your personal bank account, then there will be a mix of personal and business transactions which can make it difficult to track your business expenses so it is best to keep separate accounts for personal and business use.

We recommend two bank accounts:

One for day to day bills and invoices
One for tax – income tax, GST and your employee’s superannuation.

For example, if you earn $110, $10 will go to GST, and about another $10 to income tax. This leaves you with $90 to cover your other obligations and business operations. By creating separate bank accounts, you can ensure your obligations are met.

Step 5: Register your business name with ASIC

Now that you have set up a company, if you want a business name that is different to your company name, through ASIC. The ASIC business name portal can be accessed via https://asicconnect.asic.gov.au/ Business names need to be renewed every three years.

If you start out as a sole trader, for example, then establish a company, your exisitng business name can easily be transferred to the new company.

Step 6: Buy your domain name

While you are planning to buy a business name through ASIC, check that the domain name is available as well. This will help you make a decision about your business name and whether it’s the right one.

You may want to buy a few domain name variations to protect your brand. They cost approximately $25 per annum depending on which provider you use so it is a relatively inexpensive way to protect your domain name.

There are many domain name providers, here are some:

https://ventraip.com.au/

https://www.godaddy.com/

https://www.crazydomains.com.au/

https://www.webcentral.au/

Step 7: Do you have employees?

Whether you are a sole trader, a partnership, a company or a trust, you can have employees in all these business structures. However, as a sole trader, you cannot be an employee of your business which has implications.

As soon as you have employees, you need Workcover. If you’re operating a company or trust, you become an employee of this entity and are covered by Workover. But if you are a sole trader, you are not considered an employee and cannot be covered by Workcover.

Once you change your entity status, this needs to be updated on ASIC and there will be reporting obligations that you need to stay across each year.

Employee obligations include:

Withholding PAYG tax on behalf of the employee which needs to be remitted to the government monthly or quarterly.
Superannuation which you must pay on behalf of your employee. If they earn $1000, you currently need to add another $105 for superannuation (10.5%).
Set up Workcover insurance.
Upgrade your accounting package to STP (Single Touch Payroll) which sends details of wages, tax and super contributions to the ATO after every payroll processed from your accounting system.

Also note that as your employee numbers grow, you may become liable for payroll tax when the payroll is $700,000+ annually. (Victorian Payroll Tax)

Step 8: Managing GST and BAS statements

When your business earns $75,000 or less, you do not need to be registered for GST. If your income is greater than $75,000, then you must be registered for GST.

GST is goods and services tax. You must add 10% GST to every invoice you send to your customers if you are registered for GST and this GST component must be sent to the ATO each month or quarter through a BAS – Business Activity Statement.

If you earn under $75,000, GST registration is voluntary so you can still invoice and report GST if you wish. Sometimes your customers may wish you to have GST for their own bookkeeping and accounting purposes.

When you buy goods and services for your business and these include GST, this can be claimed back each time you lodge your BAS statements.

This is one reason it is important to have a separate bank account for taxes.

Step 9: Managing the taxes payable by your business

We live in a great country and yes, taxes must be paid and preferably on time to avoid headaches later.

Here are the common taxes that you need to plan ahead for:

GST is the tax on selling or purchasing goods and services.

Income tax is the tax on your profit earned, less the allowable deductions. This is a tax over and above GST.

Income tax is paid annually whereas GST is paid monthly or quarterly. In the first year of your business, you’ll pay income tax at the end of the financial year after your tax return is lodged. Thereafter, you continue to pay PAYG instalments either monthly or quarterly, which is income tax paid in advance. At tax time, Colledges will determine, whether there is any refund from the instalments or a shortfall and therefore more payable. To ensure that the correct tax is paid, Colledges can assist with tax planning.

Payroll tax – only payable when your employee wages reach $700,000 per annum (Victorian Payroll Tax). Payroll tax is calculated and paid monthly.

Step 10: Set up business insurance

Insurance is important when you set up a business. It will give you peace of mind and protect you from unforeseen circumstances should anything go wrong. Below is a list of the common insurances that are available when you run a business. Not all of these will be applicable, but some will. Please talk to us about insurance for yourself or your business and we will put you in touch with professionals who can assist you in finding the best options for yourself or your business.

Income protection insurance – this insurance protects your personal cashflow and provides a monthly benefit that pays around 75% of your income if you are unable to work.

Professional indemnity (PI) insurance – Your clients rely on you to deliver quality services and advice. If for any reason they feel you have not fulfilled your obligations, they may decide to make a claim. PI insurance provides cover for claims of negligence, error or breach of duty made by a client arising from the services you provided to them.

WorkCover insurance – If you have employees, you must have WorkCover insurance. If you are a sole trader, income protection insurance is a good substitute. If you are a partnership, company or trust, then you can take out Workover insurance for yourself and your staff.

Business insurance – this covers disruptions to normal business due to floods, fires, or cyber-attacks. It also covers stock and public liability.

Principal insurance – also known as Key Man insurance, which may include income protection insurance of the individuals who run the business. This insurance will protect you if the key people are unable to work.

Life insurance – all the main principals for the business should have life insurance to protect their assets and families in the event of their death.

Building insurance – If you own the building you work in, you need building insurance. If you lease the building, you are still required to pay the building insurance to make sure it is properly insured.

Always speak to an insurance professional about your specific needs

Talk to us about setting up a new business

At Colledges Accountants+Advisors, we have a trusted network of professionals who help our clients start and run their businesses.

Give us a call on (03) 9851 6500 or email us at hello@colledges.com.au to help get you started on the right track and your ducks lined up. Our friendly team is here to assist you and to help make this exciting adventure a profitable one.