So you want to work for yourself? Perhaps it’s time to turn a hobby into a business or make the shift from being an employee to freelancer. Whatever your plans, setting up your own business is exciting, but the legal and tax preparation can be daunting. This article will walk through how to set up your business correctly from the get go and avoid any hassles down the line.
Here are five steps to register as a self-employed business owner:
- Decide on a business structure
- Apply for an Australian Business Number (ACN) or an Australian Company Number (ACN)
- Register your business name
- Apply for any necessary licenses and permits
- Complete relevant tax registration
Do you have to register a business if you’re self employed?
The answer to this question depends on how your business is structured.
The most simple answer is that you don’t necessarily have to register your business, but even if you’re not legally bound to do so, it’s a good idea.
Unofficially, self-employed means different things to different people: freelancer, contractor, business owner, entrepreneur, the list goes on.
But officially—from a governmental, legal, and tax perspective—it all depends on the steps the business owner takes to organise the business.
‘Registering’ a business in Australia means having a business number which identifies your business. Most commonly for small businesses, this will be an ABN.
What is an ABN and how do I get one?
An ABN is a unique 11-digit number that makes it easier for businesses to interact with the Australian government. It is free to register and your ABN details will be stored in the Australian Business Register.
After you register for an ABN, you will be able to complete other relevant registrations such as registering your business name or making relevant tax registrations.
You will also be able to get an AUSkey in order to transact with government agencies online, be endorsed as a deductible gift recipient or an income tax exempt charity, and claim energy grants credits.
Once you have your ABN, you’ll put it on all your invoices as confirmation of your business’ legal identity.
You apply for an ABN through the government’s Business Registration Service online and you’ll need to have identified your business structure, have proof of identity and details of your business activities and associates ready.
It is not compulsory for businesses to register for an ABN however getting an ABN makes running your business easier, particularly if you have to register for other taxes. For example, if you need to register for goods and services tax (GST), you’ll need to apply for an ABN first.
Without an ABN, other businesses must withhold 47% from payments they make to you for tax purposes.
So let’s take a step back to address the big decision you need to make before you can apply for an ABN. What is your business structure?
Business structure types
When you want to be self-employed, the key decision you need to make before you can make anything official, is what kind of business structure you will have. How are you going to set it up?
Your business structure can determine:
- the licenses you require
- how much tax you pay
- whether you’re considered an employee, or the owner of the business
- your potential personal liability
- how much control you have over the business
- ongoing costs and volume of paperwork for your business
Your decision should be based on the size and type of business you envisage and how you want to run it.
It’s good to know you can change your business structure along the way if your business expands. Starting out, you might want to go for the most simple option, which is to register as a sole trader.
1. Sole trader
A sole trader business structure is the simplest and cheapest to set up. As a sole trader, you have full control over your assets and business decisions, and fewer financial and tax obligations than if you own a company. However, you’re also legally responsible for all financial aspects of your business. That means your personal assets – such as your house or your car – can be seized to pay off any debts if the business runs into financial trouble.
Despite the term ‘sole’, you are not limited to working alone – you can of course hire employees to help you. When hiring employees you’ll have to consider obligations such as making superannuation contributions and providing for workers compensation insurance.
The key elements of a sole trader business structure are:
- is simple to set up and operate
- gives you full control of your assets and business decisions
- requires fewer reporting requirements and is generally a low-cost structure
- allows you to use your individual tax file number (TFN) to lodge tax returns. As a sole trader, you’re an individual running a business, so the Australian Taxation Office (ATO) allows you to submit an individual tax return that includes your business and it’s income and expenses.
- doesn’t require a separate business bank account, although this is recommended to make it easier to keep track of your business income and expenses
- requires you to keep financial records for at least 5 years
- has unlimited liability and all your personal assets are at risk if things go wrong
- doesn’t allow you to split business profits or losses made with family members
- makes you personally liable to pay tax on all the income derived
There are pros and cons of sole trading. Clearly, sole trading is a simple set up. It takes no paperwork to get started, you can mix your personal and business funds and only need to file a personal tax return. You and your business are one in the same from a liability perspective.
However, that simplicity comes with personal risk. Since your business is an extension of yourself, you are personally responsible for your business liabilities.
For example, if you default on a business loan, the bank can foreclose on your home, car, investments, and anything else you personally own.
If you think it’s too risky, you have other options. The other three most common business structures in Australia are partnerships, companies and trusts.
If you have one or more business partners, a partnership structure is a way of sharing control and management of the business.
You won’t be able to separate your personal liability from business liability with a partnership,but you might be able to limit it.
There are 3 main types of partnerships. In a general partnership (GP) you have unlimited liability along with the other partners. In a limited partnership (LP) you can limit your liability to the amount of money you have put into the partnership, however this is usually for passive investors who aren’t actively involved in the business. In an incorporated limited partnership (ILP), the partners can have limited liability however there needs to be at least one general partner with unlimited liability who would become personally liable if the business can’t meet its obligations.
Like sole traders, partnerships have minimal reporting requirements, although you will need to lodge a partnership tax return each year, in addition to your own.
You and your business partners must have separate tax file numbers and must apply for an ABN.
Tax wise, you don’t pay income tax but each partner pays tax on the share of net partnership income they each receive.
Partnerships are governed by a Partnerships Act in each state and territory, so you’ll need to refer to your local legislation.
If you want to completely avoid personal responsibility for your business, you need to establish a separate business entity for your business by creating a company.
A company structure means your business can incur debt, can sue and be sued and you’re not liable, as a member, for your company’s debts. Financially, you could be asked to pay the company any amount unpaid on your shares and if you are a director, you could be held personally liable if you breach any of your legal obligations.
Companies are expensive and complicated to set up and run. Their key features are:
- is a separate legal entity
- requires you to understand and comply with all obligations under the Corporations Act 2001
- means that business operations are controlled by directors and owned by the shareholders
- means company members have limited liability
- means the money the business earns belongs to the company
- requires an annual company tax return to be lodged with the ATO
- requires you to complete an annual review and pay an annual review fee
- directors are required to complete a declaration of solvency each year
- means wider access to capital
Corporations are the most formal business entity available. There are a lot of hoops to jump through to get a corporation compliantly started. But, once you have some basic infrastructure in place, most of the ongoing requirements become part of your business schedule and culture. These requirements exist to protect shareholder interests and employee interests.
Along with shareholder and employee protection, the corporate form completely separates business liability and personal liability.
If you take out a business loan under a corporate form, and your business defaults, the bank can only foreclose on business-owned assets. Your personal assets are shielded from the bank by law. The separation between the business and the owner is called the corporate veil.
If you have been operating as small trader and are interested in changing to a company structure, check out our article about making the change.
You can also run a business as a trust where a trustee operates the business. The trustee can be a person or a company and they run it for the benefit of others called beneficiaries. This is also an expensive way to set up and operate a business and requires a formal legal trust deed to be drawn up which outlines how the trust will operate. The trustee needs to undertake formal yearly administrative tasks.
Sole trader vs Company
Companies are subject to an annual review by the Australian Securities Investment Commission (ASIC); sole traders aren’t.
Companies must maintain financial records that comply with the Corporations Act 2001.
Company directors have to lodge two tax returns – their own and a company tax return. Sole traders only lodge an individual tax return.
Sole traders don’t pay income tax on the first $18,200 they earn. For companies, there is no tax-free threshold.
Sole traders pay the individual tax rate that corresponds to their income. Companies pay the standard company tax rate of 27.5%.
Sole traders may qualify for a discount on Capital Gains Tax (CGT); companies won’t.
If you’re in doubt starting out, it could be easier to go for a sole trader structure and you can always change over to company structure later as your needs change.
Choosing and registering a business name
If you are a freelancer, contracter or partnership, you could conduct business using your own name. There’s no need to register if you or your business partner are trading under your first name and surname.
However, if you want to give your business its own name, you’ll need to register it. You might also want to check domain providers first to see if you could get a website with your business name of choice.
To find out if your business name is available, search the business names register on the Australian Securities & Investments Commission (ASIC) Connect website.
It costs $36 to apply to register a business name for a year and $85 for three years.
You can apply for a business name through the Business Registration Service. When you register you’ll need to:
- know your business structure
- have an Australian business number (ABN) or be ready to apply for one
- checked your business name is available
Note that registering your business name doesn’t give you full rights over the name. If you want exclusive rights, you need to apply for a trade mark.
A business name is registered nationally with the Australian Securities and Investments Commission (ASIC). This allows your business to operate in any state or territory.
How to register for licences and permits
In addition to getting your ABN and registering a business name, you may also need to register your business in order to get approval for business activities or to protect your business and employees.
Licensing and permit requirements vary according to state, local laws and industry. Businesses that often require licenses cover a wide range of industries from medical offices and law firms to home inspectors and non-profits.
You can explore industry specific licence information on the government’s business website.They have information on legal, operational and business issues for the following industries:
- accomodation and food service
- administrative and support services
- arts and recreation
- building and construction
- financial and insurance services
- information media and telecommunications
- professional, scientific and technical services
- rental, hiring and real estate
- retail and wholesale trade
- transport, postal and warehousing
You can find all the licences and permits your business might need by searching the Australian Business Licence and Information Service (ABLIS).
Being self employed: Tax basics to know
Just as registration requirements for businesses depend on the business structure, so too do tax considerations. Some taxes are compulsory depending on the size and type of business. Other taxes are optional.
Here are the differences for sole traders and companies.
Sole traders pay tax at the individual income rate. The full company tax rate is 30%. Different company tax rates apply to companies that are base rate entities. You can keep up to date with any changes to company tax rates on the Australian Taxation Office website.
Sole traders lodge an individual tax return. As a sole trader, you can reduce the tax you pay by claiming a range of deductions or expenses related to running your business.
Companies need to lodge a company tax return which must show the company’s income, deductions, income tax the company is liable to pay.
As a separate legal entity, the company must lodge its own tax return and pay tax on income. If you are a director or employee of your company, you still need to lodge your own individual tax return.
The tax-free threshold for individuals is $18,200 in the 2019–20 financial year. There is no tax-free threshold for companies – you pay tax on every dollar the company earns. There is no tax-free threshold for companies, but they can claim deductions.
Generally, company tax is complex and many businesses rely on tools like online accounting software to make sure they meet their obligations.
Capital gains tax (CGT)
A capital gain is the profit you make on an asset when you sell it – the difference between what you bought it for, and what you sold it for. If you make a capital gain from selling an asset you’ve had for at least a year, you might be able to reduce the capital gain as a sole trader by the discount method, the indexation method or one or more of the 4 CGT concessions available for small business.
Generally, the discount method doesn’t apply to companies when calculating capital gains, but a company might be able to use the indexation method.
Small business concessions
Small businesses can get some tax concessions regardless of business structure. In order to be defined as a small business, you need to have less than $10 million aggregated turnover. Possible concessions include, income tax concessions, GST and excise concessions, PAYG (pay as you go) installments concessions and FBT (fringe benefits tax) concessions.
You need to register for goods and services tax if you have a GST turnover of $75,000 or more, or your business is to provide taxi or limousine travel, or you want to claim fuel tax credits. Otherwise, registration for GST is optional. If you’re registered for GST, you’ll need to make quarterly BAS reports.
If you have employees you also need to collect PAYG withholding amounts from their wages and send to the ATO. You can do so through Single Touch Payroll. You’ll also need to pay super for all eligible employees.
If your employees receive a fringe benefit you may also need to pay fringe benefits tax. You’ll need to register for FBT as soon as you start providing benefits to your employees. You may also have a payroll tax obligations. Payroll tax is a state and territory tax so you’ll need to check the rules in your state/territory. You’re only liable for payroll tax if your total Australian wages exceed the tax-free threshold in your state, or the state your employees are located.
Tax File Number (TFN)
All businesses need a TFN. Sole traders can use their individual TFN but partnerships, companies or trusts needs a separate business TFN.
Registering a company
To register a company, you’ll need to get an ACN before getting an ABN.
You can apply for tax registrations through the Business Registration Service and will need to identify your business structure, provide proof of your identity and have details of your business activities ready.
How to register your business
- Get an ABN or ACN
- Register a business name
- Have a TFN. If you’re operating a partnership, company or trust, you’ll need a separate business TFN
- Register for GST (if your turnover is more than $75.000)
How to register as a self-employed business owner depends on what you mean by ‘register’
Generally speaking, all self-employed business owners will need at least a personal tax file number and business number to get started. You will then need to identify what other registrations are necessary for your business, whether it’s a business name, industry specific registrations or tax related. Follow the government guide to find the registrations applicable to your business.