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Thursday 24 May 2012

What business structure is right for you?

I often get people telling me they want to start a business. This is an exciting time for any budding entrepreneur. I know all too well how tempting it is to just jump in and run, but it’s important that you give serious attention to the way you structure your business as well.

There are several different ways to set up your business structure, with a variety of tax and legal issues to consider.
I’ve decided I’m going to cover each structure in its own separate blog, in order to give each one the attention it deserves (and also not to bore you – I know that people don’t find business structures as exciting as I do!).
So let’s look at the ‘Sole Trader’ structure.
Sole Trader
A sole trader is essentially an individual with an Australian Business Number (ABN). There are a number of reasons why you may choose to start up as a sole trader. You may be only branching into the business world on a part-time basis, while you study or work another job. You could simply be looking for the quickest and easiest way to get started, avoiding the ‘red tape’ that comes from establishing a company structure.
Like anything, there are both advantages and disadvantages to taking this path. Here are some of the more significant ones to think about:
Advantages:

·       There are cheaper start-up establishment costs.

·       You have complete control of the business – you don’t have to worry about shareholders or director’s duties.

·       The financial reporting is less complicated, which also means lower accounting fees.

·       You are taxed at an individual tax rate – this means that if your profit from the business is less than $37,000 you will be taxed at a lower rate than the flat company tax rate of 30% on any profit.

·       You don’t have superannuation, workcover or payroll obligations (although I strongly recommend still contributing to your superannuation – it’s a business tax deduction and you don’t want to end up with no money in your super at say, 60 years of age).

·       In limited circumstances, you can offset your business losses against other income (such as employee income) or carry forward any business losses to offset future profits.
Disadvantages:
·       Because YOU are the business, you’re also personally liable for any debts of the business. You need to seriously consider all the risks involved, and factor in the value of your personal assets, such as the family house, and whether you would be prepared to lose those assets if something went wrong.
·       While not paying workcover might save you money, it also means that if you have an accident, you will not be able to access the benefits associated with it. It’s definitely worthwhile to consider taking out a sickness and accident insurance cover.

·       If your business starts going really well, your profits are still taxed at individual tax rates. This means that if you make $180,000 in profit, you’ll get taxed at 45% for any additional profit instead of a flat company tax rate of 30%.
So these are some things to consider before deciding to become a sole trader. Individuals will always have specific needs and it’s important that you always seek professional advice before setting up your business.
In my next blog, I’ll begin to explore the issues to consider when setting up a Pty Ltd company structure.


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Tuesday 1 May 2012

Can a bank account help you sleep?

Entrepreneurs dream of going into business because of the lifestyle it can afford them. But many often get trapped in the negative side of entrepreneurship without breaking through to the positive aspects. This is backed up by the alarming stat that approximately 50% of businesses don't make it past their fifth trading birthday.

Have you ever spent the night worrying about how to pay all the bills that keep piling up? Have you ever avoided returning phone calls from creditors because you don't have the money and are not sure when its coming in? Even if you haven't been in this situation, I've discovered a secret that one of the most successful business owners in the world has used to eliminate the worry.

While I believe there is no single magic wand solution to business cashflow issues, one great way to minimise stress could be to start up a "sleep well at night" bank account.

It's a concept that is certainly good enough for Warren Buffet. The world-leading business owner is a strong advocate of such a business account. He maintains his own "sleep well at night" bank account of approximately $20 billion dollars (this is what helped him sieze opportunities during the GFC, when most other companies had huge debt reserves instead of cash reserves). Okay, so this numbers a bit out of reach for the struggling small business owner. But to put this in some perspective, $20 billion is equivalent to two months revenue for Warren Buffet.

And I think two months revenue is a realistic goal for business owners to set aside in their "sleep well at night" bank account. Like anything, short-term targets can make it work. Over the next 6 months, you could aim to put one months revenue set aside. If that seems like a bridge too far, aim for two weeks revenue. A key way to do this could be to immediately transfer out a small percent of revenue each time it comes in. A business budget is also a must have to ensure the success of implementing a "sleep well at night" bank account.

One strategy that I've used for a client in the past involved setting up a high interest, no bank fee account with a separate smaller bank (smaller banks and credit unions can often give you better interest, but shop around) that wasn't automatically linked with their normal trading account. This made the money in that account that little bit harder to get back into the "black-hole" of the business cheque account. So its similar to a term deposit, but with funds that you can access if you need too.

This "sleep well at night" account strategy is great for a small business with relatively low debt levels. If you have high debt levels, than you may need to adopt a different strategy focusing more on debt reduction to sleep well at night. If you don't have any spare cash to think about a "sleep well at night" account, than you may need a complete business overhaul to get back to achieving the reasons why you wanted to go into business. I intend to touch on some of these issues in future blogs.