Structuring Your Home Based Business

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www.business.gov.au

This information is for Australian chicks and is available from www.business.gov.au

What type of business structure will you use? Will you be a sole trader, in a partnership, a company or a trust? There are advantages and disadvantages to consider for each. Choosing your business structure is an important decision, so you need to investigate each option carefully.

When making your decision, consider whether your activity is a business, or a hobby. Remember that to be able to claim business deductions you must be carrying on a business. Other factors to consider are the cost of set-up, the taxation implications, the expense of ongoing administration and your personal financial liabilities.

You may want to consult a professional business adviser, accountant or solicitor for advice.

You need to decide on the business structure that best suits your business needs. This decision will determine what type of registration procedures you need to take.

Obtaining legal or other professional advice can help you understand your own particular circumstances.

The four main types of business structures commonly used by small businesses are:

- Sole trader: an individual trading on their own

- Partnership: an association of people or entities carrying on a business together, but not as a company

- Trust: an entity that holds property or income for the benefit of others

- Company: a legal entity separate from its shareholders.

Tax obligations for each are explained below:

Sole Trader: A sole trader is the simplest business structure and consists of an individual trading on their own. That person controls and manages the business

The income of the business is treated as the person's individual income and they are solely responsible for any tax payable by the business. This means that, after deducting allowable expenses, they include all their business income with any other income and report it on their individual tax return.

Sole traders pay the same tax as individual taxpayers, according to the marginal tax rates. Individuals who are Australian residents don't pay tax on the first $6,000 they earn. This is called the tax-free threshold.

Sole traders generally are required to pay PAYG instalments during the year towards their expected end-of-year tax liability.

Partnership: For tax purposes, a partnership is an association of people who carry on a business as partners or receive income jointly. A partnership is not a separate legal entity and doesn't pay income tax on the income earned by the partnership. Instead, each partner pays tax on their share of net partnership income.

While the partnership doesn't pay tax, it does have to lodge an annual partnership income tax return to show all income earned by the partnership and deductions claimed for expenses incurred in carrying on the partnership business. The tax return also shows each partners share of net partnership income.

Partnerships are not liable to pay PAYG instalments. Instead, individual partners may be liable to pay PAYG instalments on their share of income from each partnership they are a member of.

Company: An incorporated company is a distinct legal entity with its own income tax liability, separate from an individual's income tax. Companies are regulated by the Australian Securities and Investment Commission.

A company is a more complex business structure, with set-up and administrative costs usually being higher than for other business structures. A company is required to have a separate bank account.

For tax purposes, a company means a body or association, incorporated or unincorporated, but does not include a partnership or a non-entity joint venture.

If a business is run as a company, the money earned by the business belongs to the company.

Under the self-assessment system, companies have to lodge an annual company tax return, which shows the income and deductions of the company and the company's income tax payable. Companies also usually pay PAYG instalments, which are credited against their annual income tax liability.

A company pays income tax on its assessable income (profits) at the company tax rate, which is currently 30%. The amount of tax to be paid is reduced by any PAYG instalments reported during the year. There is no tax-free threshold for companies .

Trust: Whether or not a trust has a tax liability depends on the type of trust, the wording of its trust deed and whether the income earned by the trust is distributed (in whole or in part) to its beneficiaries. Where the whole of the net trust income is distributed to adult resident beneficiaries, the trust will have no liability. Where all or part of the net trust income is distributed to either non-residents or minors, the trustee will be assessed on that share on behalf of the beneficiary. In this case, the beneficiary is required to declare that share of net trust income on their individual income tax return, and also claim a credit for the amount of tax liability paid on their behalf by the trustee. Where the net trust income is accumulated by the trust, the trustee will be assessed on that accumulated income at the highest individual marginal rate.

If a trust is carrying on a business, each year all income earned by the trust and deductions claimed for expenses incurred in carrying on that business must be shown on a trust tax return. The tax return also shows the amount of income distributed to each beneficiary.

Trusts are not liable to pay PAYG instalments. Instead the beneficiaries or trustees may be liable to pay instalments.

It's always a good idea to consult a professional business adviser, accountant or solicitor for advice when deciding what's best for you.

Online entrepreneur Sue Papadoulis publishes the popular e-newsletter Smart Biz Chicks. If you're ready to jump-start your home business to make more money and have more fun and free time, get your FREE tips now at www.homebizchicks.com

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Chief Chick Sue Papadoulis is committed to empowering women who work from home with the means and know-how to live a life of abundance. Sue educates and advises work-from-home women, and those who dream of working from home. A wife, mother and the owner of two successful home-based businesses, Sue is uniquely positioned to help others.