People start new businesses all the time and you don't need to go through any mysterious legal process to do so; you just get started! The only real legal obligation that you have when starting a business is to account for the income you make, and that (in Australia at least) can be done with your personal tax if you don't have a separate structure in place.
You certainly will need to work out a few things, but before you go and spend a great deal of money, why not try something out and see if it works first? Baby steps. The first thing you really need to look at is your worst case scenario.
What is the worst that can happen if I pursue this business? How much can I lose financially if I jump in right here, right now? If you hear a presentation about a franchise business and the non-refundable fees that you must invest just to get the details are more than you can afford to lose right now, then don't do it. You don't want to feel obliged to continue because of the money already spent.
By all means set everything up legally if that fits your risk profile and you feel more comfortable doing it that way. Just don't let "getting it right" be an excuse to stop you from pursuing your dream. Richard Branson ran into trouble with the tax office with his first business. He accepted that he made a mistake, learnt a lot, paid all his obligations and never made the same mistake again.
"Learning experiences are the foundation of a successful business."
Once you have a concept working and making a little income, there are a lot of reasons for setting up a legal business structure:
- professional image
- asset protection
- risk reduction
- succession planning
- ability to bring in other people
- ability to on-sell the business
- reduced tax
- ability to claim business expenses and other deductions against income
Let's look briefly at why you might start looking at separating your business from yourself.
Firstly, lets say you are operating a successful home business, say as a tradesman. You might have started out small, doing $2,000 a month in business. Well done!
You might have your business in your own name as John Doe, electrician and you pay personal income tax on your profits. So what's your position?
- the business is you, so you don't necessarily have anything to sell
- the business is you, so you are personally liable if anything goes wrong
People find it much easier to associate value with tangible things. If you have a business set up in an entity that is separate from yourself, say 'Sparky Pty Ltd', then people automatically imagine that there is a separate business in place. Its easier to identify that the contacts recorded by the business are customers of that business and not just a bunch of numbers in your cell phone. It might also be easier to identify what tools of trade belong to the business and which ones belong to you personally.
In terms of risk, a typical a company has $2 worth of shares and not a lot in the way of assets. If a customer's house burnt down due to faulty wiring and their invoice is in the company name, they sue the company. If your business, your house and your car are all in your personal name, anyone suing you successfully could in effect take the house and car away to pay the debt.
What you do with your business essentially comes down to two things – value and risk, which cover all businesses, no matter what size or stage of development.
If the risks inherent in your business are small and you have no immediate desire to be able to sell it, get started! If the risks inherent in your business are likely to be high, or you are putting your business together for the specific purpose of being able to on-sell it in the near future, then set up a separate entity.