Starting a Business
You have a dream or desire to start you own business
The goal may be financial freedom, providing security for your family, the satisfaction of just working for yourself, or of creating a thriving business with plenty of action and creativity that enables you to contribute to others, society and well as self.
In starting a business there are some basics that need to be covered.
Is the business you want to start up going to be viable? Is there a market for your product?
Yes others may be doing it but what do you need to do to effectively compete with them?
A) What structure are you going to run your business in?
A Sole Trader. Partnership, Company or Trust?
There are pluses and minuses on each:
Whilst each circumstance is different there are consistences throughout and these are what the opinions below are based upon. You should not make a decision on this without speaking to your accountant first. We would be happy to advise you.
A sole trader provides no asset protection with minimal tax planning. We recomend that business do not operate as a sole trader for this reason.
A Company provides legal protection (called limited liability) and caps the rate of tax to 30%. but little by way of succession planning if at some point you want to pass the business over to you family. There are no capital gains tax concessions if the business is sold. The shares would need to be sold in order for any Capital gains tax discounts to apply and this would depend on the ownership of the shares.
A company is the traditional way of operating especially with non family partners or larger entities
A partnership offers no legal protection as the liabilities of each partner rest with the partners – each partner is liable for the debts of the other partners. As such there is limited ability to tax plan.
A Trust can provide both legal and tax planning benefits but has some down sides in relation to compliance. There are different types of Trusts, the most common for small business being Discretionary Trusts, also called a family trust whereby the Trustee has the power to distribute income and assets as he desires, to the beneficiaries of the Trust.
A Trust is an agreement or promise. A person or company agrees to hold assets for the benefit of another. Those assets can be in the form of a business or straight out assets such as buildings cash etc
The one who holds the assets in legal terms is called The Trustee – those who benefit are called Beneficiaries. The Trustee has legal control and the trustee’s name appears on all legal documents. The Trustee manages the assets or business and holds them in a “legal sense”.
The beneficiaries of the trust have beneficial ownership, (meaning enjoying the privileges and income – even though not legally owning the assets)
Because the assets are in the Trust they are protected as “nobody” really “owns” them as they are held on behalf of another i.e. the beneficiaries, thereby allowing for asset protection.
If you have assets held in a separate trust to your business and anything happened to that business – as long as there are no cross or common loans or debts between the trust and the business then the assets in the trust are safe.
Or if the assets are held in the business and anything happens to you in a legal sense a Trust can offer some protection.
If the business goes bust then if it is a Trust, (as well as a company) then your personal assets may be protected.
In a trust as the assets are held for the beneficiaries there is no change necessary in the structure if one of the beneficiaries dies. E.g. the parents in a business.
If the structure were a company the shares would have to transferred to the children that may bring about tax issues
There are various types of Trusts
These include Discretionary Trusts, Unit Trusts, hybrid trusts
Discretionary trusts are the most common for small or family businesses
Unit trusts are used where there are non family members or are often uses in property developments.
Large publicly listed managed funds tend to be unit Trust
Hybrid Trusts are a combination of features of both unit trusts and discretionary trusts, Because of their complexity we do not recommend them at this time
In a Discretionary Trust the Trustee decides, (has the discretion) where the income and the assets get distributed to.
Discretionary trusts are usually called Family Trusts as they mainly comprise of families.
The Trust itself has to distribute its income to the beneficiaries who then pay tax on the income received from the trust at whatever rate of tax is applicable to them personally.
The beneficiaries are either named specifically in the Trust Deed or are covered by a general beneficiary clause, which usually mentions all family members associated companies’ trusts etc.
The Trust Deed is a document that lays out the power of the Trustee – what it can or can’t do and lists the beneficiaries.
Religious and charitable institutions can be listed as specific beneficiaries under a trust, (or may be covered under a general beneficiaries clause), and therefore can receive income and assets as distributions from the trust.
A simple example
An engineering family business, ACME Engineering operates though a discretionary trust – called the Jo Blogs Family Trust.
The Trustee is a company called ACME Engineering Pty Ltd
The legal documentation and invoicing should say ACME Engineering ATF (As trustee for) the Jo Boggs Family Trust.
Jo Blogs and his wife Mildred are directors of the Trustee Company – so they control it and ultimately decide where the distributions go.
Jo Blogs and his wife are beneficiaries of the trust as are his children and his local church that he is devoted to and wants to give it money for its work.
For the last financial year the Trust earned after expenses and allowable deductions $200,000.
The Trust does not pay tax on its earnings (with some exceptions).
The Trust is meant to distribute its earnings and thus has the ability to legally minimize the total tax payable by distributing it to beneficiaries with different rates of tax depending on their income level.
If the business were operating as a sole trader Jo would pay tax of $66,650
If he operated as a partnership with his wife he could spilt it 50-50 (as per a partnership agreement), in which case the combined tax would be $52,000
If he operated as a company the tax would be $60,000
Joe has worked out that he does not need to get all the $200,000 to live on and wants to contribute $40,000 to his local church.
Then he has two sons who can get some of the money (they have no other income in this example.)
So the trust distributes the $200,000 as follows:-
Son No 1 $40,000
Son No 2 $40,000
The tax for Jo his wife and his sons are $6,150 each – a total of $24,600, (at 2012 rates). Compared to $66,650 as a sole trader, $60,000 as a company and $52,000 as a partnership.
There is no tax payable on the money to the church as it is an exempt organization for tax purposes.
Now there are a myriad of rules from case law and the tax office that can add complications to trust distributions such as the Bamford case. This involved different types of income, (such as dividend income received in the trust) going in different directions i.e. to specific beneficiaries.
So it can get complicated especially if there are related companies and trusts which receive distributions.
One thing to note – If profits in the financial reports and the tax return are distributed the money should be paid to the beneficiaries as they are liable to pay the tax. If the trust distributes to a related company the profits must be paid to that company!
Also, the Tax office is cracking down on trusts by administrative means. They are making sure that Trust Deeds have sufficient descriptions of what is income (arising from the Bamford case), and also that in some cases the distributions are declared prior to the end of June if the Trust deed states that it needs to be!
Hence the need for accurate and up to date books!
Any business structure must fit into the long term goals and strategies for the business and YOURSELF.
Each has it’s own cost structure with the partnership and the sole trader being the least expensive in terms of accounting and compliance costs.
The correct structure can provide not only maximum asset protection, succession planning but enable effective legal tax minimization.
Other “Legal’s” you need to look at:
a) Tax file number
d) Superannuation for employees SGC (super guarantee charge being 9.5% of payroll) if your payroll is over $450 per month
e) Withholding tax for employees( includes Directors fees
f) Fringe benefits registration (if needed)
h) Any relevant permits and licenses
j) Work cover – may be needed for certain types of contractors
B) Business plan
A Business plan is vital in any start up business and any business for that matter.
It should cover:
A) The products you are going to sell
B) The market and how you are going to get your product to that market. Is there a real demand for that product?
C) Budgeted forecasts re profits and cash
D) How your product is costed i.e. what does it cost to make or procure it
E) What you need to do to break even
F) What personal requirement you need
G) A Marketing strategy including websites
H) What advertising you are going to initially embark upon
I) What Start up finance is needed
J) Strengths and weakness of your business
K) Where and what are the opposition doing?
L) Where is you business to be located
M) What assets & equipment are needed
N) Do you need employees
A lot of business fail as they have a bright idea for a business but never do the home work to determine is there is a market for that product. What is the existing scene? Is there a gap in the market? What is the competition doing?
How would you package your product to the market?
E.g. if a restaurant, what menu do you offer and at what price? If selling chocolates how are they to be packaged to the market, what price, how boxed, what quantity in each box etc. How do you know that people will buy it?
If a pizza Shop – why would they come to you? Why is you product any different from the others?
What Avenues are to be used for marketing?
Social Media such as Face book is used daily by 8 5 million people in Australia. It cannot be ignored along with other social media sites such as LinkedIn, Google Plus and others
Social media is a powerful tool in driving people to look at your Website.
Have you go the resources and time to keep up with all this? Or do you find it a little overwhelming?
We have alliances with experts in Social media that have proven results in getting more leads to your business.
Public relations – is basically what people think of your product or company
A definition could be good works well known
I.e. the work that you do or products that you sell are well though of in the community
For any business it is vital that public relations are gotten in.
There are many ways of doing this. For example- one could write an article for the local newspaper about what your product offer – not so much as and advertisement but as information. Introducing oneself to the other business in the area is a way of getting known.
There are many ways to get your good works known in the community
One could have very good product or service but if you are not well known or thought of as nobody knows you exist, your sales and or income will be less than as the guy who has a lousy product but is better or more widely known.
The best product or service does not always get the most sales!
We have marketing knowledge and strategies that can get your business known.
An effective website – can give creditability to your product but has to reach your market and triggers a response that make people pick up the phone or order
Your product on line.
Other traditional means of marketing and advertising should not be ignored.
Online Marketing such as the Website, Google Adds, face book advertising should also be complemented with traditional non online advertising such as direct mail, flyers Fax mail outs etc where these have proven to work in the past
The effectiveness of each and for that matter any promotional activity should be monitored.
All promotional activity should be preceded by either surveys or careful observation to see what is needed in the market place, in other word don’t just take the word of some advertising Guru who pushes his own ideas and as such don’t work. A lot of advertising needs to be continually repeated as it did not obtain the results in the first place!!
Insurances are needed not necessarily wanted!
They are a necessary expense of the business
Insurances that need to be considered are:
a) Income protection, as a small business owner if you do not work you doesn’t have any income as a result of an accident.
b) Life insurance
c) Public liability
d) Professional indemnity
f) Property, asset insurance
g) Business interruption insurance( if you business is down as a result of say a fire)
h) Asset cover for all equipment and property
E) Hiring people
At some point due expansion the business needs more people. This is general a good thing as it shows expansion but with it comes
a) Payroll cost
b) Super cots
c) Workcover cots
Many business do not realize that no matter who you are employing the person to some degree needs to be hatted or grooved into the position despite the qualifications and experience they posses.
Very basic training or orientation processes need to be undertaken for all employees not matter where there position is in the business. This is a cost to the business even if in down time i.e. no output until the person gets up to speed
We can assist in guiding what to do in this area
Are you hiring Contractors?
There are specific tax office rules that determine whether someone is a contractor or employee. Just because someone has an ABN means they cannot be a contractor
Some industries lean toward contractors such as cleaners and certain building industries but generally the rules are:
1) A contractor has the right to hire others to do the work
2) He supplies his own equipment
3) He can come as go as he pleases – there is no master servant relationship
4) Get paid by results and is responsible for correcting errors or faults
5) Generally – not paid on an hourly basis
The specifics of the business will need to be assessed to determine if contractors are of and correct for your business
What to look for when hiring someone?
Most people hire based on an interview. But at an interview the person tells you what you what to hear and even with some pointed questions you may not really know if the person is effective or not. There are ways of ensuring you get the right person whether it is an office workingmen or a tradie. We can teach this so you do not have to rely on expensive personal firms or taking a punt on advertising only to find out late with much expense that the person did not work out.
The Location of the business can be critical especially it is retail or reliant on other industries. Give careful thought and evaluation as to likely customer traffic for your business. Location of competitors rent costs, travel for any staff.
G) Property Rental leases
If renting a property the lease should be reviewed so that one would need to give consideration to the length of the lease and terms such as how rental increases are calculated as well as outgoings
Leasing and Finance
The are a number of alternatives with different tax effects.
The business obtains as tax deduction for the lease rental payments however the financier owns the asset until the lease is paid out wherein the lessee has the option of baying it at its residual value. If the business does not want to buy it and it is soled and its value is less than it’s written down value the business is responsible for the shortfall. The GST is claimed on each lease payment
2) Commercial Hire purchase
The finance company retains ownership of the asset until the business pays it off on a principal plus interest basis. The interest is tax deductable and the asset can be depreciated. Gat cam is claimed dup front if you accounts are operating on an accrual basis (not cash). If operating on a cash basis it is claimed equally over the period of the lease
3) Chattel Mortgage
With a Chattel mortgage the business owns the asset and hence can claim depreciation as well as the interest as a tax deduction. GST Can be clam up front as the business is the owner
The interest payable on the loan is tax deductible and as the business owns the asset it can be depreciated. As well GST can be claimed dup front.
Each of the four methods above should be analyzed to determine not only the tax benefit through deductions and depreciation but also the net costs such as stamp duty registration, insurance and maintenance costs.
H) Record keeping
Often the bane, ( the thing that ruins) of small business, or even medium business for that matter record keeping is vitally important not only to ensure that you keep up with your tax payments but also know if you are making money or not.
Various accounting packages exist, such as MYOB, QuickBooks, Xero, Cash flow manager.
Not all are double entry bookkeeping
We can assist you in selection of the most suitable package based upon your needs and how much time and resources you can put into it.
A double entry bookkeeping system may not be needed for your business.
Programs like Cash flow manger are simple and easy to use with the minimum of training. and are not double entry system based, but can produce things like invoicing.
Cloud based systems may suit where you need multiple access from different locations, i.e. where there are multiple offices where you are constantly traveling in your business.
Cloud based may suit may suit some tradies where the application allows quoting to be done online that goes back to the system that can them produce invoices and have the accounts system updated automatically.
Once the Record keeping in under control you need to know where you are at on a timely basis.
By implementing our Weekly Income and Financial planning Program for your business you know exactly where you stand on weekly (not monthly basis), that all bills are covered including tax with income strategies and targets for the following week.
Following these strategies is it impossible to become insolvent!
BUYING A BUSINESS
As someone once said –buyer beware!
This applies as much to a used car as a business!
Because a business is a much larger ticket item a much rigorous appraisal and checking procedure needs to be entered into to ensure that what you are buying has the income stream and assets that you paid for.
Generally when buying a business you may buy it for its potential, but you only pay for its exiting or proven profits plus any assets at agreed value.
There are different methods of valuing business. The most common is a multiple of net earnings or as multiple of gross income.
The higher the risk in the business the higher the rate of return needed and the less multiple effect.
E.g. A small business might be sold for three times it earrings which give a rate of return of 30%
A less risky business might go for 7 time its earnings.
Café for instance are currently being sold for between 15 and 25 time weekly turnover. Car washes around 2 time there annual gross income
Variable factors exist such as location length of lease can affect the selling price.
Some things and checks things that should be thought of
a) Why do you want o buy that business? Do you have experience in it?
It is important that the business fits in with overall goals and strategies and that you have a passion for the businesses otherwise setbacks can easily zap your energy
3) Can you raise the finance for it?
4) Why is the seller selling?
5) What condition is the business in? Is it performing poorly?
6) Are you paying a fair price for it?
7) Is the seller disclosing all the information?
8) Will the seller assist you for a period in the business and introduce you to suppliers etc?
9) Is the vendor prepared to enter into a restraint of trade agreement?
Part checklist for due diligence:
a) Ensure the sales contract is vetted by your lawyer
b) Ensure everything is documented and be pedantic
c) Are you just buying the business or the structure that goes with it? This will have future tax and liability considerations
d) Have the full financial reports and tax returns for minimally the past three years?
Have the due diligence review
Asset listing ass condition of assets
Rental lease agreements that are in place
Debtors listing noting age of debt owing and size of client i.e. are you buying a spread of client or only a small number thereby increasing the rick fact
Creditors listing noting age and size of the creditor
Are the financial results in line with other same businesses?
There are other checks that are done and we can provide a comprehensive check to ensure protection and that what you are buying is what the seller or selling. We can assist in the due diligence process
A full business plan completer with strategies should be implemented for the business.
One of the mistakes made when buying a business is that the new owners want to make there mark: – “under new management” and promptly with good intention goes about what they consider to be implementing improvements and changes – a new broom so to speak. Very often however the “ new broom “ sweeps the business out of existence and the owners are perplexed as to what occurred and blame the trading conditions or the economy when in fact what occurred is that they changed very successful actions in the business that effectively drove the customers away.!
A very careful analysis needs to be made to assess the condition of the business to determine the effect of any changes to be made – when what if any.
CALL US NOW SO YOU HAVE ALL THE TOOLS AND AND STRATEGIES TO START OR BUY A SUCCESSFUL BUSINESS