Not everyone needs to set up a business structure right away.
In fact, you'll only need to do this if you are running a business, and not a hobby.
For example, in your spare time you might be testing out a product or service on some friends, getting them to pay for materials only (and not charging any other fee ) - this is likely to be a hobby and not a business.
And, if you have a hobby, you won't need to set up a business structure.
But, on the other hand, if you are running a business, you'll need to set up a business structure. And you may even need to register for GST.
Below is a guide to help you classify correctly, but as always, get advice if you are ever in doubt.
In a hurry? Jump ahead.
A hobby is something you do in your spare time for leisure.
As a hobby, you'll be able to:
Contrast a hobby to a business, discussed below.
If you have the aim of making a profit and your activity as a whole is commercial, then you're in business.
As a business, you'll be able to:
You'll need to know if you have a hobby or a business for tax, insurance and legal purposes.
Key questions to consider:
If you answered yes to most of these questions above, you're likely to be running a business.
The ATO website provides further questions, information and examples to help you understand the differences between a hobby and a business.
Well, if you're running a business, you'll need to set up a business structure.
And, ideally, you'll want your structure setup before you start entering into contracts with suppliers, business partners or anyone really.
And, you'll want to consider tax, insurance and legal factors.
The items below are not exhaustive, but they'll give you an idea about why the classification of hobby or business matters.
Tax - you'll want to know the most effective structure.
For example, sole traders and partnerships pay tax at the individual tax rate.
And, if your turnover is $75,000 or more per year, you'll need to register for GST.
And, companies that are operating as a small business will pay 27.5% tax.
Insurance - if you are running a business, you may need insurance to protect you for:
Legal - the first step is to pick the right business structure (before you start entering business contracts).
The 4 main business structures in Australia are:
Liability is a big deciding factor when choosing a business structure.
While sole traders and partnerships are personally liable for debts of the business, this is not the case for a company.
As a company director, you'll enjoy limited liability. This means, your liability is limited to the value of the company assets.
And, the company is a seperate legal entity that's seperate to you.
Also, either an an accountant or lawyer can help you set up your business structure or you can DIY.
So, now you know the difference between a hobby, a business and why it matters.
I wish you every success in your ventures!
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