Small Business Management
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Which Business Structure Should You Choose?
Before throwing yourself enthusiastically into that new small business venture, stop for a moment! Give serious thought to the business structure which best suits your particular needs. There are a number of different business structures to choose from. All have benefits, but they can also have serious disadvantages. Deciding what business structure to adopt can be difficult. Factors such as The New Tax System, personal financial liabilities and establishment costs must be carefully considered. That's why it is important to consult with your accountant or solicitor before making that decision. As a general rule the more complex the business structure, the more expensive it is to establish.
The most common business structures are: Sole Trader; Partnership; Proprietary Limited Company.
If you conduct your business alone, without a partner, then you are classified as a sole trader. This definition applies whether or not you have employees working for you.
- You are your own boss and are responsible for all decisions.
- All profits belong to you.
- It's an inexpensive business structure to establish and maintain, with the least reporting to Government.
- Losses from the business can be offset against any other income or future earnings.
- You alone have responsibility for the business.Holidays become a luxury you may not be able to afford simply because nobody else has the expertise to run your business efficiently in your absence.
- You are personally liable for all business debts, which means your assets (including your home) may be at risk.
- You continue to pay tax at the personal rate.
The establishment of a partnership can overcome some of the difficulties associated with being a sole trader.
A partnership enables a group of people to contribute their time, talents and money towards the business. In return they share the responsibilities and profits. In the absence of a formal partnership agreement, the law will assume that each partner has an equal share in the business.
A written partnership agreement makes a lot of sense. Such an agreement sets out the special conditions applying to the partnership. For example, one partner may be contributing more money or time. For this reason they may have a greater equity in the business. A formal partnership agreement will clearly spell out the conditions and diminish the likelihood of disputes.
Before entering a partnership, you should remember that many people who have been close friends for years have found it impossible to work together as business partners. Think about it!
- Taxation obligations may be minimised, particularly where members of the same family are included in the partnership. But the Taxation Office requires that all partners have real and effective control over partnership assets and liabilities.
- Responsibility for running the business is shared.
- Ability to raise finance for the business is enhanced.
- Liability is unlimited. If a partner absconds or dies, the other partners are left with the liabilities.
- If the partnership is dissolved or altered, difficulties may be experienced in obtaining an acceptable valuation or in raising capital to purchase a retiring partner's share.
The New South Wales Partnership Act makes provision for a limited liability partnership structure whereby the liability of a partner contributing capital can be limited to the amount of financial contribution, provided that person does not take part in the management of the business.
The advantage of the limited liability partnership is that it allows an investor to invest in a partnership without being liable beyond the extent of his/her financial investment, provided certain conditions are met.
Proprietary Limited Company
A private company is a comparatively complex business structure. For this reason it should not be the automatic first choice for the average new business.
The Corporations Law was amended late in 1995 by the First Corporate Law Simplification Act. The effect of the amendments is to substantially ease the regulatory burden applying to small business. Under the amended legislation, proprietary companies may have only one director and only one member.
A Small Business Guide, which summarises the main provisions relevant to small companies, is available at all Australian Government Bookshops for about $5, phone Freecall 1800 202 049.
The Australian Securities & Investments Commission (ASIC) publishes Information Sheets dealing with single-director companies and these are available from ASIC Business Centers and the ASIC Corporate Relations Unit, phone 1300 300 630.
When you form a company, you become both an employee and director of the company.
- The liabilities of the shareholders are limited to the share capital they have subscribed and any debts they may have personally guaranteed.
- It is easier to spread ownership of the company.
- The company is a separate legal entity and need not be wound up in the event of death of the directors or shareholders.
- Under the imputation system of company taxation, company tax gives rise to tax credits, which allows the company to pass on tax benefits when paying franked dividends to shareholders.
- Raising money to put into the business in return for shares is an option.
- Establishment costs are high, as are administrative costs associated with compliance with the Corporations Law.
- Lenders will often seek personal guarantees from directors before making a loan to the company.
- Losses cannot be offset against other income of the owners.
- Directors have serious and substantial obligations under company law.
Other Business Structures
In some circumstances, small businesses may find that the co-operative structure suits their special needs. Further details on this structure can be obtained from your local Small Business Advisory Centre, which has a Guide for the Formation of a Co-operative Enterprise.
Again, your special requirements may call for the establishment of a trading trust. However, a trust arrangement generally has little application to the average small business. Seek professional advice on this matter.
Registration of a Business Name
Under the Business Names Act (1962) every business name must be registered, except where the name is simply that of the owners.
If you alter your name, add anything to it or use a different name, then it must be registered. Some examples - 'John Brown trading as Honest John Autos' or 'Fastrack Pty Ltd trading as Tracker Enterprises'. Business names are registered by the Business Names Registration Centre, phone (02) 9286 0007, and cost $100 for a three year period.
There are certain names that will not be registered. Generally a name that is already registered cannot be adopted by another organisation. Additionally, names that are misleading or offensive will not be registered.
Small Business Advisory Centre staff are always available to talk over business management issues. Call a Small Business Advisory Centre to set up a confidential interview with an experienced business counsellor.
What is a Business Plan?
It is probably best described as a summary and evaluation of your business idea, in writing. It allows you to think through all the facets of a business, to examine strategies and their consequences.
Preparation of a business plan is the first and most important task for the business starter. The plan should include details concerning the industry in which you operate, your product or service, marketing, production, personnel and financial strategies.
What Purpose Does it Serve?
It will identify strengths and weaknesses and help to assess whether the business is viable. It is a blueprint for starting, maintaining or expanding a business. It is a working plan to use in monitoring your achievements against targets. It should provide information required by financial institutions when finance is sought.
What Are the Benefits of Having a Business Plan?
- It forces you to fully examine your plans and actions and to set targets.
- It enables you to test your ideas on paper.
- It allows you to anticipate problems and decide how to handle them.
- It indicates to others your ability and commitment.
- It shows lenders and suppliers that you understand your business.
How to Produce a Business Plan
Step 1: Collect Information
Gather as much relevant information as possible concerning the industry in which you operate or intend to operate (use books, industry associations, existing business owners).
Collect all possible information regarding the market/s you are aiming at (who buys, why do they buy, what are the key features the customer looks for).
Learn all you can about the product/s or service/s you intend to produce, distribute or offer.
Define and decide on the structure necessary to carry out the operation, including the number of staff you will require (see brochure on Business Structure).
Step 2: Analysis
Read over all the material you have collected to determine what it all means, how it can be used and what can be discarded. The key question to ask is:
'Will costs of running the business leave enough from what you expect to make to pay a wage and reasonable profit to you as proprietor?'
When Steps 1 and 2 are completed, you should have decided if there is a market for your product or service which is large enough and sufficiently accessible to indicate that your proposed entry into that market is financially worthwhile. Now you are ready to commit your plan to paper.
Step 3: Strategy Formulation
Decide how the business will operate. You should describe how the business will be managed and the staff and organizational structure that will be in place. There are three parts that go together to make a comprehensive business plan:
- Marketing Plan, which includes location, method of selling, market share sought, packaging, pricing and so on. The four key elements are product, price, promotion and distribution.
- Operational Plan, which includes supply sources, costs and quantities of materials, processes, equipment and methods of extending the services or products offered.
- Financial Plan, which is a master budget for the operation and includes:
o cash flow forecast;
o balance sheet;
o profit and loss statement;
o sources of finance;
o sales forecast and target;
o market share.
The financial aspects of the plan are most important and you should develop or access financial skills to make sure this part of your plan is accurate and realistic.
Most businesses are required to have an Australian Business Number (ABN) and are required to submit a quarterly Business Activity Statement (BAS) under The New Tax System. This makes maintaining accurate financial records imperative.
Checklist for New Starters
Areas you will need to have included in your Business Plan are:
- business structure;
- location and premises;
- plant and equipment;
- finance: including cash flow forecast and breakeven point;
- sales strategy;
- records to keep;
- legal requirements;
- costing and pricing.
Do not forget set-up costs and the money needed to see you through an initial period of low cash flow when calculating your first year's budget.
Sources of Industry Information
- Small Business Advisory Centres' First Base
o Institute of Chartered Accountants in Australia (02) 9290 1344
o CPA Australia (02) 9375 6200
o Association of Taxation and Management Accountants (02) 9568 3544
o National Institute of Accountants (02) 9299 3052
- Law Society of New South Wales (02) 9926 0333
- Industry Associations:
o Australian Business Chamber 13 26 96
o Australian Industry Group (02) 9466 5566
o State Chamber of Commerce (NSW) (02) 9350 8100
o Australian Retailers Association (02) 9290 3766
- Australian Bureau of Statistics 1300 135 070
- Trade and Industry publications
Update Your Business Plan
Nothing remains constant in business; circumstances change, markets change, fashions change, methods change.
From time to time you must check your sources of information and reassess your business plan. What is relevant when you start is not necessarily so in five year's time. You may also need to revise targets and budgets if external factors (such as interest rates) vary.
Keep your information up to date and be prepared to change as circumstances demand. A business plan should be thought of as a process, not just a document. Own it, be able to explain it to others and amend it as necessary so that you can be in control of your business and your life.
Ask for Help
This is only a brief outline of business planning. Never be afraid to admit you need help. Your accountant can assist you.
Remember, Small Business Advisory Centres have experienced business counsellors available to check your plan and offer guidance on the proposed venture.
People don't plan to fail
They just fail to plan
Better Business Tip
Don't spend too long creating the 'perfect' marketing or business plan. Many businesses get bogged down writing huge documents that never get implemented. Remember a short plan that gets carried out completely is going to do your business a lot more good than a long plan that doesn't even make a practical start.
Steidl P The Art of Strategic Planning: Visions and Strategies for Cultural Organisations – Department of Communications and the Arts and Business Victoria, Department of State Development Canberra 1997
Museum Methods: A Practical Manual for Managing Small Museums – Museums Australia Canberra 2002 www.museumsaustralia.org.au
English J How to Organise and Operate a Small Business in Australia – Allen & Unwin Sydney 2001 www.allen-unwin.com.au
Establishing a Small Business - NSW Department of State and Regional Development 2002 www.business.nsw.gov.au
- Also see:
- State Government Arts Sites