January 11, 2018

These are the 5 most important things when starting out in business

Mistakes made when starting out in business can be expensive to rectify later on. Existing business owners may also find the following tips useful.

(1) Funding and Equity Decisions

There are a number of ways to fund a new business including:

  • Bootstrap (essentially, building a business from personal finances or from the operating revenues of the new business)
  • Family and friends
  • Personal loans
  • Business loans
  • Asset loans
  • Debtor financing
  • Angel capital
  • Venture capital
  • Crowdfunding

Your personal circumstances will typically dictate what’s possible, but be sure to do your homework and take advice.

Another way of gaining funding is to take on a business partner. This leads to a discussion of the very slippery issue of equity. Taking on a partner or granting equity to another person in your business is not a decision to be taken lightly. Equity can be forever. Once a person has equity, you will forever be sharing profits and/or ownership with them, and forever reporting and accountable to them. You should think long and hard about who can offer genuine, long term strategic value to your business and who is merely undertaking a task or filling a role. If it’s the latter, that person should generally not be a candidate for equity. The key here is to reward value not time.

There are no “hard and fast” rules, but here are some questions to ask when considering whether someone is deserving of equity in your business:

  1. Will they deliver long-term value and be instrumental to the business’ success?
  2. Will they take the business to heights it couldn’t otherwise get to?
  3. Will they solve a crisis that threatens the business’ livelihood?
  4. Will they cause greater damage by doing their own thing?

Having decided that someone is deserving of equity, the style of equity they should receive is then a separate consideration again. There are once more a number of options which include:

  • Full equity
  • Dividend (profit) participation but not capital participation
  • Phantom equity (in other words, a bonus scheme of sorts)
  • Vesting equity (i.e. equity that vests gradually over time based on targets being met).

(2) Choice of Trading Structure

When we talk about “trading structures”, we are referring to a decision between sole trader, partnership, trust or company. Every circumstance is different and the right answer will sometimes be a combination of more than one entity. Utilising the wrong structure and needing to rectify it later on can lead to significant disruption and transaction costs, including capital gains tax and stamp duty. It pays to seek professional advice to come up with a structure that suits your circumstances, and is scalable and effective.

Among the considerations when choosing a trading structure are:

  • Income Tax effectiveness
  • Capital Gains Tax (CGT) friendliness in the event of a future sale
  • Asset protection (both personal and for the business)
  • Liability
  • Estate and succession planning
  • Cost (establishment and ongoing)
  • Complexity
  • Ownership requirements.

It may be cheaper to avoid using a professional advisor, but a simple mistake when choosing your structure can mean paying a much higher price later on.

(3) Understand Your Statutory Obligations

When you’re starting out in business, the excitement and frenetic pace can sometimes mean that the more mundane tasks can be neglected.

It is important to understand which government identifiers you will need, which include:

  • Tax File Number (TFN)
  • Australian Business Number (ABN)
  • GST & PAYG-W registrations
  • Business name registrations

Similarly, you should develop an awareness of your reporting obligations and their timings. This refers to the likes of:

  • Financial statements
  • Monthly or quarterly Activity Statements
  • Annual Income Tax Returns
  • ASIC filings (companies only).

And then of course there is arguably the trickiest area of all – employing staff. This spawns a myriad of issues which you should seek expert advice on, including:

  • Distinguishing employees from contractors
  • Determining the status of employees, i.e. casual vs part-time vs full-time
  • Ascertaining rates of pay (including Awards) – employees are generally speaking incredibly sensitive when it comes to any mistakes made with their pay
  • Understanding leave entitlements
  • Obtaining TFN Declarations and Choice of Super forms
  • Making quarterly Superannuation payments
  • Preparing Payment Summaries.

(4) Embrace Cloud Accounting

Cloud accounting, sometimes referred to as “online accounting”, serves the same function as accounting software that you would install on your computer, except it runs on hosted servers and you access it using a web browser or app. Your data is thus stored and processed “in the cloud”.

Cloud accounting can carry with it a host of benefits to business owners, stakeholders and advisors, including:

  • Real-time
  • Reduced data entry
  • Intelligent software
  • No more filing
  • Automatic back-ups
  • One version
  • Mobility and flexibility.

In the Australian market, most of the major software vendors have cloud accounting offerings.

(5) Surround Yourself With Good Advisors

Being new to business is not for the faint-hearted. It can be a lonely and incredibly daunting space. You need to pick a good team and that includes professional advisors who understand your mission and passion, and want to take the journey with you.

Regardless of the space that they operate in – whether it be bookkeeping, accounting, legal, financial services or any other – the aim should be to choose advisors who are as much your partners in business as they are your supplier of services. Sometimes it will take a while to settle on the right advisors, but you’ll know when the time arrives.

This information is provided by Australian Bookkeepers Network and is reproduced with permission.

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