Risks and responsibilities

Owning and operating a business generally involves greater risk and responsibility than working for someone else. Although running your own business can be a very rewarding venture, it is a step to take only after carefully considering your motivations, skills and experience.

Going into business is a long process that requires dedication, time and energy, especially during the early stages of set up where you may find the line between home and work life becomes a little blurred.

Certain activities are vital to the successful setup of a new business and a Feasibility Study to determine the commercial viability of your proposed venture is also a good idea. Issues that can influence success or failure of a new venture are:

• Sufficient demand for your product or service.
• Access to adequate start up capital.
• Products being sold at an acceptable and profitable price.
• A good location for the business.
• Your business and people management skills.
• Business and industry training and experience.
• Your knowledge of the industry.
• Efficient use of Market Research information.
• Initial and ongoing business planning.
• Compliance and licensing requirements that affect your type of business.
• A high level of energy, enthusiasm and passion for your business.
• Your capacity for hard work.

General management skills and an understanding of the field of business are critical success factors. Inadequacies in skills or resources should be recognised and rectified before you begin. To complement your existing skills, you should network with others in and around your industry and find out which organisations can provide you with advice or assistance. Further training can help you top up any skill deficiencies as you continue to work on your business.

What are the advantages of starting a business?

Running your own business requires a broad range of skills and can provide many benefits. Some reasons for wanting to own and operate a business are:

• To earn a better living.
• Greater feeling of control over work destiny and outcomes. 
• To develop your own creative ideas.
• To produce a quality product.
• To build a business asset that you can leave to your children.
• To assist with your retirement.
• You dislike working for other people.
• You have identified a need in the market that you can profitably fill.
• Working hours can be more flexible.
• Personal pride of ownership.

Operating as a sole trader is the most common structure used when starting a business. When the business is being started part-time, while the owner continues in full-time employment, operating as a sole trader allows the owner to reduce tax payable on the employment income if losses are made. This tax reduction is subject to the business satisfying non-commercial business loss provisions. When it comes to choosing a business structure, income tax should be only one of many considerations.
From an income tax point of view, nothing stops business owners operating through one structure, such as a sole trader, then later changing the structure to one that better meets their needs. The Australian Tax Office will not be able to attack this change as long as the prime reason for changing was not to obtain a tax benefit.

Compared with the other business structures, operating as a sole trader is the cheapest option to set up and the easiest to administer. There can be no set-up costs unless a business name is required. In addition, the only administration system required is an accounting or bookkeeping system that produces a statement showing business revenue and expenses, and the profit or loss.

As people cannot employ themselves, a sole trader is not required to pay WorkCover on earnings from the business. However, this also means that if an accident occurs the sole trader will not receive WorkCover benefits. To protect himself or herself, anyone operating as a sole trader should take out sickness and accident insurance.

Superannuation is another disadvantage for a sole trader, who can only claim a tax deduction for super contributions as a self-employed person. This means contributions up to $5000 are fully tax deductible, while 75 per cent of any contributions above that are tax deductible up to the age-based limits. This means an owner wanting to get a tax deduction of $10,000 must contribute $11,666.

What are the Disadvantages of business ownership

Self-employment is sometimes seen as the only option after retrenchment or if there is a change in your employment circumstances. But take care not to rush into business out of a sense of desperation. It is always better to keep your money in the bank until the right opportunity presents itself than to lose it to a poorly conceived business idea.

To help provide a realistic picture of business ownership, it is important to understand some of the potential disadvantages of going into business:

• Long working hours can cause physical and mental stress and strain. 
• High levels of responsibility.
• You are usually the sole decision maker.
• Your income will vary and you may need to live on other income until the business is profitable.
• You may lose some employee benefits, such as holiday pay and sick leave.
• There may be hidden costs associated with your business.
• Greater responsibility with taxation and insurance such as public liability.

Under income tax law, the ATO can attack anything it can prove was done for predominantly income tax reasons. When it comes to choosing a business structure, income tax should be only one of many considerations. By considering these other factors, the chance of the ATO successfully attacking any change is greatly reduced.

In addition to income tax and capital gains tax, the other important factors that should be considered are protection of personal assets, the set-up cost of the tax structure, legal liability, superannuation and WorkCover.

This income tax advantage becomes a disadvantage when the business starts to make profits, as the business income will be added to the owner's employment income. This could mean that tax is paid at the higher tax rate of 42 per cent when the combined income exceeds $52,000, or at 47 per cent if it exceeds $62,500.

Legal liability and protection of personal assets are two areas where operating as a sole trader is a major disadvantage. In the event of a legal claim against the business, where insurance does not cover the full extent of any damages awarded, the owner's personal assets can be attacked to pay the damages.

This should only be regarded as a major consideration where the business has a high level of operational risk. An example would be a tree-felling business. In the event of a tree falling the wrong way and destroying a house, the cost of rebuilding the house could force the owner of the tree-felling business to sell his home to meet the liability.

Another risk can arise where a business incurs large debts to suppliers and then fails. Operating as a sole trader means suppliers can attack the owner's personal assets to meet any shortfall the business owes. One way a sole trader can protect against this, if he or she is married, is to have all assets owned by the spouse.