There are a lot of different approaches to defining the small business entity in Australia. Many companies choose to simply refer to the entity as a “corporation”, while others would prefer to use a more specific definition such as “a limited liability company (LLC) or a limited partnership”.
In this article, we’ll explore what each means, and whether you should use them or not.
Before we get into that though, it is worth knowing that there is no official definition for what constitutes a small business entity in Australia. There is certainly no single body of law which governs this area, meaning the options provided by your local agency or accountant may not be the best advice for your situation. The following are some common definitions:
A small business entity registered with ASIC (Australian Securities and Investments Commission) refers to an entity owned and controlled by individuals who can exercise control over its activities. This definition is intended for use at the start of your venture, when you have little idea how many people you need to employ and how much capital you need to raise (and when you don’t have any experience with finance).
A small business entity registered with their local government refers to an entity that is owned by government bodies and entities such as school boards. This definition is intended for entities which will be operating on a larger scale than would be possible through individual ownership; say, a company employing 100 people and granting them shareholdings with no limit on how many people can buy shares simultaneously.
An SME is any enterprise organisation whose annual turnover does not exceed $10million AUD per annum. This can include incorporated IT companies such as cloud computing providers or web hosting services (the turnover is relatively minor). It’s important to note that ‘small’ does not always mean ‘low’.
For example: A company may have only one employee but has become so large that they need full-time staff (and therefore would fall under this definition); it could also be a software development firm with only one employee but has grown so large that they require full-time management staff (and therefore would fall under this definition).
The many benefits of being a small business entity
Many people start their business journey with a big, long-term goal in mind: they want to start an Australian small business. However, they often find that the process of setting up a small business entity is incredibly complicated and time consuming.
In this post we’ll discuss why this is, and how you can simplify the process if you do decide to get started on your small business journey.
The Australian Small Business Enterprise (ASBE) Act 2013 defines a small business entity as follows:
(a) To be a small business entity, the entity must have a turnover of less than $10 million for the financial year (that is, it must not include trading businesses). As noted above, ASBE should not be taken literally as this means that it does not include those businesses that trade over $10 million in any 12 month period.
The definition also includes those who are “controlled” by an entity that has less than $10 million turnover. For instance, if XYZ Corporation owns 100% of XYZ Limited then XYZ Limited is considered to be controlled by XYZ Corporation for ASBE purposes as both entities have less than $10 million turnover for each financial year. Also included within ASBE are entities where more than 50% of the directors are wholly owned subsidiaries of another ASBE entity.
These types of entities may be disregarded under certain circumstances (such as when one or more directors are wholly owned by another person or group).
Note that the ASBE definition indicates that any “business” in Australia would fall under one of those five definitions (which roughly means “any form of commerce”). As such, it is worth considering whether you might have some form of product or service which would fall into one of those other three categories – specifically whether you were trading with customers or customers were trading with your company – before trying to set up a company to meet your needs.
If so then you might want to consider looking into registering your firm as an ASBE rather than starting down a road with only some basic features like limited liability and limited partnerships available at launch or after-launch; these simply don’t provide enough protection against losses on trade disputes, which can happen even when there aren’t any physical assets involved (“customer” here includes anyone who buys something from your company).
Why starting your business journey as a small business entity is a smart move
A small business entity is an entity that has a limited liability. In Australia, this is the type of business required for an individual to establish a limited liability company (LLC). It operates as a separate entity from the owner and business.
An LLC can be used to carry out business activities that would not be permitted by a corporation under certain circumstances, such as investment in real estate or other assets. It also allows the owner of an LLC to elect to have it treated as a partnership for tax purposes.
In Australia, only companies with less than $10 million in annual revenue are allowed to have an LLC. The same entity rules apply for partnerships, so if you are starting off as an entrepreneur and don’t have much capital, you may find it will benefit you if you start your business with one of these entities instead of a corporation.
How to take advantage of the benefits of being a small business entity
The tax treatment of small businesses is one of the most contentious issues facing Australia today. While there is currently no legal definition of a small business entity, there are several common-sense criteria that can be used to determine whether a business has:
- A clearly defined and manageable “business model”
- A reasonable profit margin (must be at least 15% of revenue)
- A structure that minimises administrative complexity and promotes agility and flexibility in managing the business
- Whether its assets are tangible or intangible, or both
The tax implications of these criteria vary from state to state, with some jurisdictions taking a more hands-off approach than others. While it is important that you consult your accountant prior to declaring your small business entity, the following considerations will help you avoid the pitfalls associated with being an unregistered entity in some states:
- Do your homework – Many small businesses consider themselves business entities for tax purposes simply because they have been registered for personal income tax purposes (under Schedule B).
For example, if you have been paying Australian Taxation Office (ATO) on your commercial activities for years previously but have not registered as a business entity before, you may be able to claim a deduction for previous amounts paid by way of capital losses. But this is only available under very specific circumstances and only applies to certain types of property.
It does not apply if your company has been paying ATO Corporation Tax for less than three years; nor does it apply where you are using a different name (e.g. using Company ABC instead of ABC Business); nor does it apply where you are using an Australian GST number instead of an Australian Business Number (ABS).
On the other hand if your company has been paying ATO Corporation Tax on its commercial activities for at least three years and hasn’t registered as a business entity before, then it will qualify as a small business entity under this section.
- Do what’s necessary – If you do decide to register as a new or existing small-business entity in relation to any commercial activities, then make sure that all documents relating to the registration are kept up-to-date and contain sufficient information about ownership and control so that any subsequent changes can be properly accounted for.3. Be realistic – Often people believe that self-assessment is all about reducing their tax liability; in reality this isn’t usually the case with most businesses who implement self-assessment because most audits aren
The challenges of being a small business entity in Australia
The definition of a small business entity in Australia is:
…a business, a unit of management or a body corporate that is incorporated under the Corporations Act 2001 and has not been formed for the purpose of carrying out any commercial activity.
The first thing to note about this definition is that it does not define what commercial activity means, or if there is any definition at all. A bare-bones business with no other assets, who have only one employee (and who are self-employed) is exempt from this definition.
However, if you have a new startup which has just started out (or you’re an established business which has recently been acquired), then you will probably need to register as a small business entity (or incorporate). If you don’t already do either of these things, I recommend taking the time to do them now so you know how to work through the various registration and incorporation options for businesses in Australia.
This article from The Startup Lawyer explains why being an SA entity can be worth it for businesses considering going public, but it also touches on some other things such as running your business without having to rely on outside investors and getting access to professional consulting services.
How to overcome the challenges of being a small business entity
When starting your company, it can be a challenge to work out what your small business entity is. Is it a sole trader? A partnership? A limited company? Corporations are generally not allowed to do what you are doing (at least in Australia), so the answer is often “no”. And while you might be tempted to ask your accountant or lawyer what you need to do, the answer is usually no.
Many of the problems you might face with getting your business registered are similar to those faced by people starting small businesses everywhere, and they include:
- The lack of resources: There aren’t as many resources available as there used to be, and with less competition, it’s much harder to get things done.
- Lack of information: Companies have grown up doing this kind of thing, so they don’t know how to get their point across in a way that makes it easier for people who don’t have an accountant or lawyer. (i.e., “the more I know about your business plan, the more interested I will be in helping you do this for me!”)
- Lack of experience: People make mistakes when they first start, but if you can find someone who has done something like this before and ask them how they did it well enough that they want others to try it too (which is obviously impossible – there just aren’t enough people like that) then you can hopefully avoid making mistakes yourself.
A few tips:
If you plan on selling something that is also going to take time (like software), then think about putting together some documentation along with your business plan and promotional material so that you have an effective looseleaf notebook for keeping track of everything.
Good examples include guides for using accounting software and consulting firms on how their clients use them; a template for product packaging; etc… This makes it easier for everyone involved (including yourself), giving each person only one set of eyes in case anything goes wrong along the way.
If possible, make sure everything from day one has an email address associated with it – someone will probably be asking questions by email if nothing else works. Depending on where your project sits on the value chain (for example, part-time vs full-time vs freelancing vs being self-employed), there may be different rules around starting a business; however if all parties involved agree that all
The future of small business entities in Australia
Australia is a small market and the Australian Small Business Business and Grants Commission (ASBGC) has been working to improve the tax treatment of small businesses for most of the last decade.
The ATO, after lobbying by large corporations like Google, proposed that the ASBGC introduce a “small business entity” (SBE) regime – an entity that is too small to be an individual, but not so big as to be a corporate entity (CBE).
The ASBGC rejected this proposal and said it would be better to leave SBEs alone in the same way they are now. However, any smaller entities would need to be registered as corporations – which will prove complex.
The ASBGC also said it doesn’t want to redefine what makes a “small business”, but has broader consultation on what SBEs should look like.
So what is a small business entity? There are three potential definitions:
- Adults aged 18 years or older, who have at least one employee or partner;
- Small businesses with fewer than 10 employees or partners;
- Small businesses with less than $10 million in turnover.
The Government says you can use either of these definitions. You could call your company “Business X” or you could call it “Small Business Z” but in either case you must have at least one employee and have turnover less than $10 million – even if you don’t get any other revenue from your business (though some government agencies may grant you more if you demonstrate a clear business purpose).
The only people who can do this are sole traders or partnerships who meet the definition of a sole trader/partnership in their own right (again, not necessarily ones that already exist).