Notes from 2023 on moving from sole trader to a company.

Resources

• https://business.gov.au/planning/new-businesses/starting-a-business-checklist
• https://www.airtree.vc/open-source-vc/

Should I start a company?

A Company (big L) is a legal entity. Like a person, but without a body. Other options are sole trader, partnership and trust. Company best fit for a startup for limiting liability, salebility,

More paperwork: Tax return for the company. Some ASIC stuff. More documents in general.

More cost: ~$500 to start and ~$1000 a year to run.

Conclusion: not too much extra shit. Worth it for neatness of account, cred.

Planning

Do the business.gov.au business plan for dummies.

Ownership

Consider who owns the shares. Me? Family trust? Family trust has overhead but generally considered ‘better’ for tax (sure) and liability (how?).

Advice says liability via trust is not reduced compared to direct ownership, and ‘it depends’.

Family trust good if you want to ‘minimise’ tax, but more complex and $2k? setup fees.

Choose 1000 shares @ $0.01 to enable atomic unit of ownership of 0.1%. Just ordinary shares, keeping it as simple as possible.

Naming

A have a ABN and Business Name as a sole trader. Apparently (.gov.au call) it’s straightforward to transfer this to the company name and indeed during registration there’s just a few tickboxes.

Insurance

Getting money in/out

Get Director fees, dividends or salary. Pay (personal income) tax on money received. Each of these has some complexity – such as deducting PAYG tax, super, reporting via OneTouchPayrool. (This is a bit of a pain compared to sole trader or a trust.)

Record all transactions in/out of business. Remembver it’s the business’s money

Obligations

• “Office Holder” (a Director) has specific responsibilities including
  • “act in company’s internet (over own personal interest!)
  • know what’s going on
  • ensure records are keep
  • notify ASIC of changes to address / shareholders / etc
• Records, paperwork
• Director ID (link):
• Keep company solvent (i.e. can pay debts)

Reporting Requirements

Reference on ASIC.

Basics requirements

• Display the ACN everywhere
• Record meetings (“general” and “directors”)
• Record financial transactions

Reporting Terminology

Choose “accrual” method (compared to ‘cash’ method). My business works on invoices (not cash like a grocery store). This is a little more complex but better suited. Like giving customers credit. In cash accounting, it’s hard to prove “oh yeah, johnny owes be $10”. With accrual, that’s recorded as an entry “trade receivable”

More words:

Chart of Accounts,

Some key documents:

Balance Sheet

Equity = Assets - Liabilities

value of company is company it owns less what it owes.

• Assets can be current (cash, liquidifable) or non-current (equipment, ideas, patents). Similar for liabilities.
• Current assets = cash + acccounts receivable (money owed to company) + stock
• Non-assert = intangible like patents + plant + long-term investments
• Equity = money from buying shares in company + retained earnings (i.e. didn’t give as dividends) +additional capital (i.e. other money given somehow)

Profit & Loss

In order:

Gross Profit = Sales of goods - Cost to make the goods
This is just 'turning the handle'

Operating Profit = Gross Profit - Operating Costs
Operating costs include admin, r&d, marketing

Net Profit = Operating Profit - Miscellaneous
Miscellaneous incomes/costs like interest, asset purchase/sale

Cash Flow Forecast

For the next n months, start with “cash balance” from the previous period. Then add expected income (sales), minus expected costs (salary, tax, costs of goods sold). This is the cash balance at the end of the month.

Budget

Not sure how this is different to Cash Flow Forecast, expect we don’t care about starting balance?

Chart of Accounts

List of ‘accounts’ which in this context are buckets of money/liabilities you transfer between. Like “accounts receivable” (maybe mapping to a real account) but also “rent” and “retained earning”. Helps with converting from “transactions” to “financials”.

Implementation

• Need a office address, bank account, and the like.
• Get the company first, then the bank account
• $600 via business.gov.au (also excellent help via phone), straightforward
• Director ID is easy (see link above). Not sure about linking the company and the director?

Tax Returns