How to start a business in Australia

A sole trader is you, trading. There is no separate legal entity, so the business's debts, contracts and liabilities are yours personally, and your home and savings are exposed if it goes wrong. Income is taxed at your marginal rate, losses can sometimes offset other income subject to rules, and compliance is minimal — no separate tax return, no annual review fee, no directors' duties.

It is the right structure for most people starting out with low liability exposure: freelancers, consultants, tradespeople with adequate insurance, small service businesses. It is the wrong structure where the work carries real risk of a large claim, where you need to bring in partners, or where you expect to sell the business as a going concern.

A partnership is two or more people carrying on business together. It is cheap to establish and flexible, but partners are generally jointly and severally liable, which means each partner can be pursued for the whole of the partnership's debts including those incurred by another partner. Partnerships without a written agreement covering decision-making, profit share, exit and dispute resolution are the source of a disproportionate share of small business litigation.

A company is a separate legal entity registered with ASIC. It limits the liability of its shareholders, it can be sold or partly sold, it is taxed at the company rate rather than your marginal rate, and it carries genuine obligations: directors' duties, an annual review fee, financial records, and a director identification number for every director. Directors can still be personally liable for unpaid PAYG and superannuation, and for trading while insolvent, so the limited liability is real but not absolute.

A trust holds assets for beneficiaries and is run by a trustee, often a company. Discretionary trusts are commonly used by family businesses for asset protection and flexibility in distributing income. They are more expensive to establish and administer, the rules on distributions and losses are complex, and they are frequently sold to people whose circumstances do not justify them.

Changing structure later is possible but not free. Moving assets between entities can trigger capital gains tax and stamp duty, contracts and licences may need renegotiating, and there are concessions for small business restructures that are conditional and easy to fall outside. Getting advice from an accountant before starting is cheaper than restructuring afterwards, and the cost difference is usually an order of magnitude.

The practical test is not 'which is most tax effective at current profit'. It is: what happens if we are sued, what happens if a partner leaves, what happens if we want to sell, and what will this cost to run every year even in a bad one.

Check you are actually in business. The ABN application asks you to confirm you are carrying on an enterprise, and the ATO applies real tests — commercial intent, repetition, scale, business-like records, a profit motive. Hobby income is not business income, and an ABN obtained for something that is not an enterprise can be cancelled retrospectively.

Apply for an ABN through the Australian Business Register. It is free, it is done online, and you will need your tax file number, your proposed business activity and, for a company, the ACN. Applications that cannot be verified automatically go to manual review and take longer, so accuracy matters more than speed.

Register a company first if you are using one, because the company needs an ACN before it can get an ABN. Company registration goes through ASIC or the Business Registration Service, and every director must obtain a director identification number before being appointed — this is a personal obligation with penalties and it cannot be done by your accountant on your behalf.

Register a business name if you will trade under anything other than your own name or the company's registered name. Business name registration is with ASIC, is renewable, and gives you no ownership rights over the name at all — it is a registry entry, not a trade mark. If the name matters commercially, look at trade mark protection separately.

Add tax registrations as they apply. GST is compulsory once your turnover meets the threshold and optional below it. PAYG withholding applies once you pay employees, or contractors under a voluntary agreement, or make payments to businesses that have not quoted an ABN. Fringe benefits tax, fuel tax credits and wine equalisation tax apply in narrower cases. The Business Registration Service lets you do most of these alongside the ABN.

Work out your licences before you commit to premises or equipment. The Australian Business Licence and Information Service asks for your industry and location and returns the Commonwealth, state and local requirements that apply. Councils in particular regulate food premises, signage, trading hours, waste and change of use in ways that can make an otherwise suitable site unusable.

Open a separate business bank account. Companies and trusts must keep funds separate as a matter of law; sole traders should as a matter of sanity, because reconstructing business expenses from a personal account at tax time costs more in accounting fees than the account ever costs to run.

Get insurance before you start trading, not after the first job. Public liability, professional indemnity, product liability and workers compensation apply differently to different businesses, and workers compensation is compulsory in every state once you employ someone. Some licences and most commercial leases require specific cover as a condition.

Record keeping starts immediately and the standard is higher than people expect. You need records that explain all transactions, in English or a form readily convertible to it, kept generally for five years. Bank statements alone are not records — you need the invoices, receipts and contracts behind them, and for vehicle and home office claims you need the specific substantiation the ATO requires.

Choose an accounting method deliberately. Cash accounting recognises income when you receive it and expenses when you pay them; accruals recognises them when invoiced. Cash accounting is simpler and generally better for cash flow in a small business, and eligibility for cash accounting for GST is limited by turnover. The choice affects your BAS as well as your books.

PAYG instalments arrive once you have lodged a return showing business or investment income. The ATO puts you into the instalment system and you begin pre-paying tax quarterly. The first year is the shock: you can end up paying the previous year's tax and the current year's instalments in the same period, and businesses that spent the first year's profit routinely find this out too late.

Superannuation guarantee applies to employees from their first pay, and to some contractors who are engaged wholly or principally for their labour — a rule that catches many businesses that think they have no employees. Super must be paid by the quarterly deadline and reaching it late means the superannuation guarantee charge, which is not deductible and includes interest and an administration component.

Single Touch Payroll reporting applies to employers, meaning wage and super information is reported to the ATO each pay run rather than annually. That requires payroll software from the start rather than a spreadsheet.

Payroll tax is a state tax with its own thresholds and rates in each jurisdiction, and it catches growing businesses that never thought about it. Grouping provisions can combine related entities, so structuring into multiple companies does not avoid it.

Contractor versus employee is the classification that produces the most expensive mistakes. Getting it wrong exposes you to unpaid superannuation, PAYG withholding, leave entitlements, workers compensation premiums and penalties, backdated. The test is about the substance of the relationship, not the label in the contract or the fact that the worker has an ABN.

There is no single national business licence, and the same business can need permissions from three levels of government. The Commonwealth regulates things like therapeutic goods, telecommunications, aviation and imports. States regulate most occupational licensing, liquor, gaming, food safety oversight, environmental approvals and workplace safety. Councils regulate land use, food premises registration, outdoor dining, signage, noise, waste and trading hours.

Occupational licences are the ones people most often assume they have. Building and trade work, electrical, plumbing, gas fitting, security, real estate, motor dealing, labour hire, childcare and many health services all require a licence held by an individual or the business, and operating without one is generally an offence rather than a paperwork problem.

Food businesses need to notify or register with the local council and comply with the food standards code, including a food safety supervisor in many jurisdictions. Home-based food businesses are covered too, and the fact that you are cooking in your own kitchen does not exempt you.

Zoning and change of use is the trap with premises. A site's current use does not mean your use is permitted, and obtaining a development approval to change it can take months and fail. Make any lease conditional on obtaining the approvals you need, and check with the council before signing, not after.

Home-based businesses have their own council rules covering signage, client visits, employees on site, vehicle movements and the proportion of the dwelling used. Most are permitted, but not all, and body corporate or strata by-laws can restrict business use independently of council rules.

Online and interstate trading does not escape state regulation. Selling into another state can bring you within its consumer, licensing or payroll tax regime, and online businesses are subject to the Australian Consumer Law in full — including the consumer guarantees, which cannot be excluded by a returns policy.

Intellectual property is the piece most often deferred until it matters. A registered business name gives no exclusive rights; a trade mark does. A domain name gives neither. If your brand has value, check availability across the business names register, the trade marks register and domains before printing anything.

Set up bookkeeping before you need it. Software that connects to your bank, categorises transactions and produces a BAS is inexpensive and removes most of the risk of a late or wrong lodgement. Retrofitting a year of records at tax time is the most expensive accounting work you will ever pay for.

Decide who does what. A registered tax agent or BAS agent can lodge on your behalf and gets extended lodgement deadlines that you do not get lodging yourself, which is a genuine benefit beyond the compliance help. Only registered agents can charge to prepare and lodge, and the register of agents is public and worth checking.

Price for the obligations, not just the costs. Quoting a rate that would be a good wage as an employee, without adding superannuation, leave you will not accrue, insurance, unbillable time and income tax at your marginal rate, is the most common pricing error in new service businesses.

Watch the GST threshold rather than waiting for it. Registration is required within a short period of realising you will exceed the threshold, and it applies from that point — meaning you can find yourself liable for GST on sales you invoiced without it. If your turnover is trending upwards, model the crossing point in advance.

Expect the second-year tax event. Income tax on year one plus PAYG instalments for year two frequently land together. A business that is growing is also increasing this gap. Reserving for it from the first profitable quarter is the difference between an ordinary year and a payment plan.

Know the hardship options before you need them. The ATO offers payment plans and, in some circumstances, deferrals and remission of penalties and interest, and it responds far better to a business that contacts it early than to one that misses lodgements. Not lodging is treated much more seriously than not paying.

Finally, review the structure once you have real numbers. After a year you will know your actual profit, actual liability exposure and actual plans for partners or a sale. That is the point at which the structure conversation with an accountant is worth having properly — and, if a change is needed, the point at which the small business restructure concessions are most likely to be available.