Starting A Home Based Business

• October 2005

When starting a home based business there are a number of legal issues to consider. Some of the first problems confronting you will be:

  • Under which business structure should the business operate?
  • Do I need to register my business and will I require a license to operate?
  • How can I protect my intellectual property?
  • What tax implications do I face running my business from home?

What type of business you intend to operate, and the size and the scope of that business will decide the answer to these questions.

What follows is a brief examination of some of these issues. Please note however that it in no way attempts to cover all the issues facing a new home based business.


BUSINESS STRUCTURE

There are four (4) standard business structures, each offering its own advantages and disadvantages:

SOLE TRADER

This is simple form of business ownership enables you to trade in your own name but offers little personal protection. Any debt incurred by the business will be recoverable directly from the owner’s personal assets.

Advantages:

  • Easy to establish
  • Inexpensive to establish
  • Owner has complete control

Disadvantages:

  • Unlimited risk
  • Difficult to raise start-up capital
  • You continue to pay tax at personal income tax rates

PARTNERSHIP

Defined under the Partnership Act 1892 (NSW), a partnership is the carrying on of a business in common with a view to profit. It is advisable to have a Partnership Agreement, which will set out the rules under which the partnership can operate and help protect all partners.

Advantages:

  • Easy to establish
  • Simple to manage - all profits and losses are shared equally between the partners according to the partnership agreement
  • Combines resources
  • Partners are able to carry on the business under a business name

Disadvantages:

  • Partners are “jointly and severally liable” meaning each partner is individually liable for debts incurred by the other partners.

LIMITED PARTNERSHIP

This special type of partnership allows a number of people to contribute funds and receive a portion of the profits but not be involved in management.

Advantages:

  • Allows funds to be raised without relinquishing management rights

Disadvantages:

  • As with a normal partnership, partners are “jointly and severally” liable

CORPORATION

This is probably the most common form of business structure, even for small to medium sized businesses. Corporations are popular because they ensure owners, directors or controllers of the company are treated as separate legal entities. However, the legislation which governs corporations, namely the Corporations Act 2001 (Cth) is extremely complex.

Advantages:

  • The company enters into legal relations in its own name, not in the name of its directors
  • Generally shareholders can only lose the value of their shares and are not liable for the debts of the company
  • Income tax rate is lower for companies than the highest rate for individuals

Disadvantages:

  • The cost of establishing and running a company are a lot higher
  • Governing rules are complex
  • Lessors, suppliers and lenders usually require a personal guarantee from either directors or shareholders


BUSINESS REGISTRATION

Under the Business Names Act (1962) every business name must be registered. This prevents you from mistakenly using the name of another NSW business or Australian Company. Information regarding this can be sought from the Office of Fair Trading.

Additionally, if you are starting a Corporation you must be registered with the Australian Securities and Investment Commission (ASIC), and allocated an Australian Company Number (ACN).

LICENSING

The term ‘licence’ includes registrations, permits, approvals, authorities, certificates, and can be issued by Government departments and local councils.

Business licensing requirements will vary on the structure of your business, the type of business activity and whether the business employs staff.

Essentially licences exist to protect consumers and ensure the health and safety of the public and the environment. Therefore penalties for operating without a licence can be substantial.


INTELLECTUAL PROPERTY

For a small business, Intellectual Property (IP) is recognised as a valuable asset and a vital element to a growth strategy. However, there are also a number of ways in which IP can be exploited so it is important that your business has adequate protection.

The first step in managing your IP is to develop an IP register. Items in this register may include:

  • Business name and logo;
  • Research and development outcomes;
  • Unique products, services, processes and applications; and
  • Unique designs of products/packaging

By doing this you can readily identify your IP and ensure it can be managed and protected like any other business asset.

Protecting your IP gives you exclusive legal rights and can be obtained through patents, trademarks, registered designs and copyrights.

PATENTS

A standard patent provides valuable protection for 20 years over a new invention or development in technology. Patents may be applied for to protect new products, innovative machinery equipment, or a new process.

TRADEMARKS

Trademarks are useful for protecting business names, product names, logos, mottos or even an animated character. By registering your trademark, it entitles you to the exclusive rights to use, license or sell your trademark.

REGISTERED DESIGN

In order to effectively market an exclusive image in the market you should consider registering your design. Registration will protect the appearance rather than the functionality of the product.

COPYRIGHT

Copyright protection arises automatically for the original artistic and literary works, computer programs and engineered drawings


TAXATION

NSW STATE TAX

In NSW the Office of State Revenue administers State taxes and depending on your circumstances you may be liable for Payroll Tax and/or Stamp Duty.

Payroll Tax

Employers, or a group of related businesses, whose total Australian wages exceed the NSW monthly threshold of $50,000 are required to register for pay-roll tax.

As an employer you must register with OSR within seven days after the month in which your wages first exceed $50,000.
If you are liable for payroll tax, the tax is levied at the rate of 6% on wages and other employee-related expenses.

Stamp Duties

Stamp duty is payable on certain transactions that may relate to the operation of your business. For example;

- Acquisition of a business, including plant and equipment, goodwill and intellectual property
- Acquisition of business premises
- Lease of business premises
- Mortgages
- Hire of goods

In general, you must pay stamp duty within three months of the transaction by which the duty arose.

FEDERAL TAX

The Australian Tax Office administers Federal taxes.

Goods & Services Tax (GST)

If you expect your business to have a turnover of $50 000 or more per annum it must be registered for GST. Charged at the rate of 10% GST is levied at all stages of production.

Registered businesses are required to lodge a Business Activity Statement, either monthly or quarterly, to report the amount of GST collected on sales as well as to claim input tax credits.


Pay as You Go (PAYG) Tax

As a business you are obliged to make PAYG instalment payments towards your expected tax liability. Your actual tax liability will be determined at the end of the income year and your PAYG installments will be credited against your assessment.

PAYG instalments and withholding are reported and paid by completing your Business Activity Statement (if you are registered for GST) or otherwise on your Instalment Activity Statement.

The amount of instalment will vary business to business and the tax office will notify you of how much is required. PAYG installments are generally paid four times per year (quarterly) however depending on your business you may be eligible for two installments or an annual installment.


FAIR TRADING

The Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW) play a key role in promoting a healthy and viable business environment by encouraging competition.

The legislation should be seen as an important business tool that not only places restrictions on operation, but also protects your business from unfair business practice.

Specifically the legislation:

• Prohibits anti-competitive conduct such as price-fixing and market sharing agreements
• Prohibits unfair trading practices such as misleading advertising
• Protects small businesses from unconscionable conduct and provides for better disclosure and dispute resolution

Knowing your rights and obligations under both the NSW and Commonwealth Acts will minimise disputes by helping your business be professional in the way it deals with other businesses.


HOW WE CAN HELP?

Ultimately, the law is complex and obtaining detailed legal advice and business guidance is necessary if you have a business. You will be entering into contracts or offering products or services with liability attached to them. With our legal and business expertise Grech Partners Solicitors can assist you in starting and/or managing your home-based business. Let us eliminate the uncertainty by contacting us today to arrange a suitable time to meet and discuss your plans.

This publication contains general information only. It is not provided as legal advice. Professional advice should be taken before any course of action is pursued, or any information herein relied upon.