I just left a meeting with a guy who wants to start a business. He’s starting out small, selling coconut water at local markets. A great idea – if he sorts out the myriad details that need to be sorted before he launches his idea and invests loads of money.
A common belief I find with people new to business, or even not so new to business, is that they believe “company” = “business”. It doesn’t. Here’s why.
A company is a legal entity, just the same as a human is a legal entity. There are several types of entities which can be used or established for starting new business, such as:
Sole trader = a human being conducting a business or businesses
Company = a legal entity with shareholders and directors. Think Commonwealth Bank of Australia or BHP Billiton – they are companies with shareholders and directors. The shareholders and directors are separate to and independent of the company.
Partnership = a separate entity, although not a ‘legal’ entity. A partnership can be two or more individuals, or two or more companies, or two or more trusts that conduct a business (or own an asset) together.
Trust = a separate entity, although not a ‘legal’ entity. A trust can conduct a business or businesses, through its trustee or trustees.
Each of these entities can conduct a business or businesses. So what then is a business? A business is an activity through which the owning entity earns income, such as a cleaning business, or an accounting business, or an online business. The point is, any entity can conduct a business or multiple businesses.
Got it or still confused? I’ll draw you a simple diagram (partnership left out for simplicity)
What’s important to understand is that an entity, no matter what type, to conduct a business in Australia, must have an Australian Business Number (ABN) and a Tax File Number (TFN). They are two different things. The ABN is required to run your business and the TFN is required for you to pay tax. Even though I know you don’t want to pay tax it’s a necessary evil.
Another thing to remember is that one entity only ever has one ABN. Therefore if an entity conducts more than one business, all of those businesses will operate under the one ABN of the entity. Also if the entity is registered for GST, which it may or may not have to, then all the businesses conducted by that business will be subject to GST and reportable in the Business Activity Statement (BAS).
If your entity runs multiple businesses the entity can own several business names. For example Small Business Know How Pty Ltd might own the business name “Smart Cookie Enterprises” to run a cookie manufacturing business, plus “Home Business Enterprises” to advise how to start a home business.
So if you’re an entrepreneur thinking about starting your own business, give some thought to the entity that is best for that venture which will give you the advantages it offers. More about those advantages next time.
To your success,
Dianne Kennedy CPA, Director of Small Business Know How, firstname.lastname@example.org www.smallbusinessknowhow.com.au