Starting or Buying a Business – Why You Need An Accountant’s Insight!

Jumping into the world of business ownership in Australia is an exciting adventure, but it’s not without its challenges. Whether you’re thinking about starting your own business or buying an existing one, there are some important things you need to know about accounting and legal issues. I’ve helped many clients start and grow their businesses, and I’m here to share some key tips to help you on your journey.

1. Choosing the Right Business Structure

Choosing the right business structure is a critical decision that affects many aspects of your business, from daily operations to taxes, and even your personal liability. It’s not just about the legal paperwork; it’s about setting the foundation for your business’s financial health and operational efficiency. Here’s why talking to an accountant is essential in figuring out which structure makes the most sense for your specific situation:

• Tailored Advice: An accountant can provide personalized advice based on your unique business goals, financial situation, and long-term vision. They understand that what works for one business may not work for another and can tailor their recommendations accordingly.
• Tax Implications: Different business structures have different tax obligations and benefits. An accountant can explain how each structure affects your tax situation, including:
  • Sole Trader: You’ll pay tax on business profits as part of your personal income, which could push you into a higher tax bracket.
  • Partnership: Similar to sole traders, each partner pays tax on their share of the profits on their personal tax return, but you need to ensure that all partners are in agreement on how profits are distributed.
  • Company: A company structure means the business is taxed as a separate entity at the corporate tax rate, which can be beneficial if the corporate rate is lower than your personal tax rate. Additionally, companies have access to certain tax concessions not available to individuals.
  • Trust: Trusts can distribute income to beneficiaries in lower tax brackets, potentially reducing the overall tax burden. However, trusts are complex and require careful planning and legal compliance.
• Understanding Liabilities: Accountants can help you understand the implications of personal liability in different structures. For instance, as a sole trader or partner, you’re personally liable for business debts, which can risk your personal assets. In contrast, a company provides limited liability, which protects your personal assets from business debts.
• Future Planning: An accountant can help you look ahead. If you plan to expand the business, bring in investors, or eventually sell it, certain structures can be more advantageous. For instance, a company structure might make it easier to issue shares and raise capital.
• Compliance and Paperwork: Different structures have different reporting and compliance requirements. An accountant can help you understand these obligations, including financial record keeping, annual reports, and audits. For example, companies have more rigorous regulatory and reporting requirements than sole traders do.
• Operational Flexibility: Your choice of structure can impact your ability to make certain business decisions quickly. An accountant can outline how operational flexibility is impacted by each structure, from the straightforwardness of a sole trader to the more complex governance in a company.

Making the Decision

By discussing these points with an accountant, you can gain a clearer understanding of which business structure aligns with your financial goals, offers optimal tax conditions, meets your risk tolerance levels, and supports your business’s growth trajectory. This conversation is about more than compliance; it’s about making strategic choices that position your business for success and stability.

So, before you settle on a business structure, take the time to consult with an accountant. Their expertise could save you from future headaches and set you on the path to achieving your business objectives more effectively.

2. The Importance of Independent Legal Advice in Business

As someone who guides new business owners through their early ventures, it’s incredibly disheartening to see passionate entrepreneurs, including some personal friends, struggle due to neglecting proper legal advice. This oversight is a common mistake with serious consequences, often transforming what should be an exciting journey into a costly ordeal.

Selecting the right legal advisor is as essential as choosing the correct business structure. I’ve witnessed too many entrepreneurs suffer because they used legal advisors linked to the seller or those lacking expertise in business acquisitions, leading to conflicts of interest and significant oversights. To prevent such outcomes, I emphasize the importance of securing an independent legal advisor, someone specialized in business transactions who truly prioritizes your interests. A skilled advisor will meticulously examine every part of the deal, from ensuring fair contracts to checking for hidden liabilities or compliance issues.

When buying a business, having a competent, independent lawyer by your side is crucial. They conduct thorough due diligence to uncover any hidden issues like debts or legal complications, review all contracts and leases to ensure you fully understand what you’re entering into, and verify that all necessary licenses and permits are correctly in place. It’s vital to choose a lawyer who has no ties to the seller and is experienced in business deals, ensuring they have only your best interests in mind.

3. Checking the Business’s Financial Health

Before you buy a business, conducting a thorough financial health check is essential. This means delving into the business’s financial statements and tax returns from the past three years to scrutinize several key areas with the help of a professional accountant:

• Profitability: Look at net profit margins, gross profit margins, and any fluctuations over the years to assess how the business generates its profits and the sustainability of these profits. A consistent profitability record is a good sign, but irregularities can indicate potential instability in the business.
• Cash Flow: Analyze the cash flow statements to understand how the business manages its cash. Check the operating, investing, and financing cash flows to ensure the business has enough cash on hand to cover its bills, employees, and other expenses. A strong cash flow indicates that the business can maintain its operations without excessive borrowing.
• Assets and Liabilities: Examine the balance sheet to assess the types of assets the business owns and the liabilities it owes. This helps you understand the company’s net worth and its leverage. Look for a healthy balance between short-term and long-term assets and liabilities to ensure that the business has a solid financial foundation without being overly indebted.
• Equity: The owner’s equity on the balance sheet shows the financing provided by the owners versus creditors. A more substantial equity position suggests that the business is not overly dependent on external debt.

Why Professional Help Is Crucial

An experienced accountant can provide invaluable assistance in this process by:

• Translating Financial Statements: They can explain the practical implications of the numbers, such as the impact of depreciation methods or unusual revenue recognition policies.
• Identifying Trends and Anomalies: Accountants can spot trends that could affect the business’s future and identify red flags like inconsistent inventory levels or irregularities in accounts receivable and payable.
• Assessing Tax Compliance: They review past tax returns to ensure the business has been compliant with tax laws, helping you avoid inheriting potential tax liabilities.
• Advising on Deal Structure: Based on the financials, they can suggest how to structure the deal to be tax-efficient and minimize financial risk, including whether an asset or share purchase is more advisable.

By understanding these financial aspects and enlisting an accountant’s help, you can make a more informed decision, avoiding overpayment and unexpected financial pitfalls in your new venture. This approach not only protects your investment but also ensures your peace of mind as you step into the world of business ownership.

4. Understanding Taxes

Navigating the complexities of tax obligations can be daunting, but with a clear understanding of what to expect, you can avoid many common pitfalls. Here’s why an accountant is not just helpful but absolutely invaluable when it comes to managing your taxes:

Key Tax Considerations

• GST (Goods and Services Tax): If your business’s annual turnover exceeds AUD 75,000, you must register for GST. This tax is a 10% levy on most goods, services, and other items sold or consumed in Australia. Calculating, reporting, and remitting GST requires precise accounting to ensure compliance and to optimize cash flow.
• PAYG (Pay As You Go) Withholding: For businesses with employees, you are required to withhold tax from their wages and remit it to the Australian Tax Office (ATO). This process helps manage employees’ tax obligations throughout the year, avoiding a large payable amount at year-end. It also includes other payments, such as from pensions and annuities.
• Capital Gains Tax (CGT): This tax applies when you sell business assets or shares, and it represents the tax on the profit (gain) you make from the sale. Understanding the implications of CGT, including exemptions, concessions, and how to calculate your capital gain or loss, is crucial for financial planning.

Why an Accountant Is Invaluable

• Strategic Tax Planning: Accountants provide strategic advice on how to structure your business transactions to legally minimize tax liabilities. This involves sophisticated planning around timing of purchases and sales, the use of tax losses, and the selection of the most appropriate tax accounting methods.
• Expert Guidance on Tax Obligations: An accountant has up-to-date knowledge of the ever-changing tax laws and can guide you through the complexities of tax compliance. This includes preparing and filing your tax returns accurately and on time to avoid penalties and interest.
• Maximizing Deductions and Credits: Accountants can identify all the possible deductions and credits that your business can claim, reducing your taxable income. They ensure that you take advantage of all applicable tax concessions and incentives.
• Handling GST Effectively: Accountants help in correctly calculating the GST you need to pay and claim back. They ensure that your GST returns are accurate and lodged on time, helping you manage cash flow effectively by planning for GST liabilities and refunds.
• Managing PAYG Withholding: They ensure you comply with PAYG withholding requirements, help calculate the correct amounts to withhold, and prepare the necessary documentation and reports. This is vital for maintaining good standing with the ATO and avoiding costly errors.
• Navigating Capital Gains Tax: Accountants provide crucial advice on CGT, helping you understand when CGT concessions and exemptions apply. This includes advice on small business CGT concessions, which can significantly reduce or even eliminate your capital gains tax.
• Audit Support: If your business is audited by the ATO, having an accountant is invaluable. They can provide the necessary documentation, explain your accounting practices, and defend the positions taken on your tax returns.
• Future-Proofing Your Business: Beyond current tax compliance, an accountant helps plan for the future. This includes forecasting tax obligations based on business growth, planning for large capital purchases, and structuring your business to support long-term goals.
• Training and Support: Accountants can train you and your staff on how to handle day-to-day tax matters, use accounting software effectively, and recognize important tax-related issues throughout the fiscal year.

Your accountant plays a pivotal role in navigating the tax landscape. By leveraging their expertise, you ensure that your business is not only compliant but also optimized for tax efficiency. This partnership allows you to focus on growing your business with the confidence that your tax affairs are in expert hands.

5. Keeping Good Records

Maintaining accurate and comprehensive records is not merely a practice for organizational efficiency; it’s a fundamental legal requirement for any business. Proper record-keeping supports your business operations, aids in financial planning, and is crucial for tax compliance and audits.

An accountant is invaluable in helping you set up and maintain a robust record-keeping system for your business. They guide you in choosing the right accounting software, ensure all your financial records are accurate, and help organize important documents like invoices and tax filings. Their expertise means you’ll have well-maintained tax records, and they can train your team on best practices to keep your data accurate and up-to-date.

Furthermore, accountants prepare insightful financial reports to help you understand your business performance and are there to support you during audits. By having an accountant manage these aspects, you can focus more on growing your business, knowing that your financial documentation is in order and your operations are running smoothly. This organized approach not only meets legal requirements but also strengthens your business’s foundation for future success.

Conclusion

Starting or buying a business in Australia is a big step, and there’s a lot to think about from accounting and legal perspectives. By choosing the right business structure, getting independent legal advice, checking the financial health of the business, understanding your tax obligations, and keeping good records, you can set yourself up for success. Remember, getting help from experienced professionals like accountants and lawyers is invaluable as you start your business journey. Make it exciting, and good luck!