More Advice on running a company

Following on from my post How to run a small company in Australia, here is some more business advice, in no particular order:

  • Keep an eye on cash flow. It can be great to send off thousands of dollars of invoices, but if you don’t have the money today to pay suppliers (or employees) then you’ve got a problem. People don’t like being paid in promises, they prefer cash. I feel very uncomfortable if I have less than a full month’s expenses (including wages) in the bank. I like having two or three.
  • Know the failure rates, and plan accordingly. My business is now almost three years old, and it’s only now that I’m starting to think “you know what, I might just be able to make this work”. A source of mine at the Commonwealth Bank says they see 70% of start up businesses fail within the first year. From my point of view, one of the key success factors is not to dream big before you’re capable. Don’t buy into the Silicon Valley mindset of buying brand new Aeron chairs for every staff member, when you don’t even have a single client (or a product/service, even). Doing so is a guarantee of failure, in my opinion.
  • Ideas really are worthless, and implementation of them is a lot harder than you first imagine.
  • Time management is important, and difficult. “Work” as such never really stops, and work hours are unpredictable. I sometimes start at 7:30am, and I’m quite often working at 10:30pm. On the other hand, sometimes I will work only a couple of hours a day and then go to the beach. But one thing is constant: worrying about the business. Worrying about client work, worrying about bills, worrying that my staff are happy, and so on. I’ve spent a lot of time learning about time management, and I might go into this in more detail in another post, but the key is this: fill your schedule up with big rocks.
  • Ask for help before you need it. Get all the advice you can. Not all of it will be good (indeed, some of it will be awful), but pick out the good stuff. Get advice from your bank before they need to bail you out, they’ll be much happier.
  • If you’ve got multiple directors and/or senior staff, think about who has access to bank accounts.
  • And the most important thing: starting my own business is the most exciting thing I’ve ever done. If you have the inspiration and the opportunity, do it. If you don’t have the opportunity, try to make the opportunity happen. Business ownership is an amazing feeling.

How to run a small company in Australia

I’ve been the director/manager/shareholder (pretty much everything) of a small company in Australia called The Foo Project Pty Ltd for around two years now. We develop software, but this post isn’t about that. Today I want to talk about the ‘boring’ stuff (though I find it fascinating): accounting, legal issues, dealing with the federal government, etc.

Please note I’m not a lawyer or an accountant. If you need one, you should get one, not read blog posts by some guy on the Internet (that’s called procrastinating and it probably won’t help you). Handy hint: if you’re reading this for advice rather than entertainment value, you probably want an accountant or a lawyer.

So the things I’m going to cover are: why you might want a company instead of being a sole trader, how to get set up, what documents and so on you’ll need to keep, and some handy things I’ve learned along the way.

Why might a company structure be helpful?

The benefits and drawbacks of a company structure become more obvious once you consider what exactly a company is and what a sole trader isn’t.

A sole trader runs a business ‘as themselves’, that is, the business is the same legal entity as the person running it. Any income the business makes is personal income for the person running it, the same with expenses. A child running a lemonade stand in their front garden is a sole trader: any profit they make is theirs personally, and that’s as complex as it gets (well, technically they need to register for an ABN, but what the government doesn’t know won’t hurt them). Another thing to note is that any debts the business have belong to the person running it, so the business going bust is the same as the person going bust.

Image courtesy of j_regan
Image courtesy of j_regan

A company, on the other hand, is a different legal entity. Any income the company makes belongs to the company, not to the person (or people) who own the company. Any debts the company has belong to the company itself (though it is common for a company director to personally guarantee some large loans for small businesses). The profits flow to the owners (called shareholders) through dividends. Being different legal entities, if one of the shareholders (to whom the profits eventually flow anyway) takes cash out of the company without the company itself authorising it, then this is fraud.

There is also another structure for businesses known as the partnership. It combines all the worst parts of being a sole trader with the worst parts of a company structure. Just avoid it.

The benefits of being a sole trader:

  • Account keeping is greatly simplified (add up all your invoices from the year, subtract all the bills, that is your profit and put that on your tax return).
  • Tax is much simpler and you’ll probably pay less of it.

The benefits of having a company:

  • Limited liability. As a shareholder, you cannot be liable for debts the company incurs unless you have promised the company money you haven’t given it yet. Note that directors can be personally liable if they do something really stupid (best consult a lawyer for what ‘really stupid’ entails, it’s a bit complex).
  • If the business will ever be sold, it’s much simpler to hand over the keys to a separate entity than try and separate the business assets from your personal assets like a sole trader would do.
  • A company structure provides a nice wrapper for owning intellectual property (and other property I guess, but I use mine for intellectual property).

How to get set up:

This is actually much easier than you think. The hardest part will be opening a bank account!

  1. Figure out how many shareholders (owners) and directors (top-tier management) the company will have, and who they will be. If anybody else will be shareholding or directing with you, remember the following:
    1. It’s easier to introduce more directors and shareholders later on than it is to remove them. Pick carefully.
    2. Being a director does involve legally mandated responsibilities, so make sure directors will be up to the job required.
  2. Go to Register A Company (or a similar company registration service, they are all over Google) and fill out the form. It’s well explained and pretty simple. Note that they will ask you for an account password, choose something unique and never used before, as they will email it to you in plain text (*sobs*).
  3. After the form is processed, which will only take a few minutes, you’ll be sent emails with a whole heap of PDFs. Print out all these PDFs and stick them in a binder. These are the company’s registers of members and officers, and it’s a legal requirement to have a paper copy of them at the company’s registered address.
  4. Go to the Australian Business Register to register for an ABN and a TFN. This will allow you to do fun things like send tax invoices and register Australian domain names, and other less fun things like paying company income tax. The process is pretty simple, but unfortunately (in my experience, anyway) it takes several weeks for them to get the details posted back to you. If you might be employing people make sure to register for PAYG withholding. If you think turnover will be more than $75,000 in the first year register for GST, otherwise avoid it as it makes accounting much more annoying (you can register later if needed).

You now have a company, but there are a few more things to do to make things run smoothly and safely.

  • Open a bank account for the company. You can do it online, but you’ll probably need to take documents into the bank anyway, so it’s easiest to just go and talk to somebody. Take in the binder of company documents, you’ll need to prove the company exists (using the ACN) and that you are a director.
  • Set up your accounting program. I use Xero, which is cloud-based, very popular, and highly recommended. I did the setup myself, but I would recommend finding a good accountant and getting their help.
  • Buying insurance is highly recommended. I have worker’s compensation insurance (which you’ll need if you’re employing people) and professional indemnity insurance (which you’ll need if you give advice to people). Any business with actual premises will need public liability insurance and contents insurance. Insurance is like leftovers from a tasty meal, better to have too much than too little. Make sure you have enough.

Keeping documents:

There are two broad categories of things to keep: legal documents and accounting documents.

Pretty much everything you will need from a legal perspective is in the binder you printed out when you registered the company. In paper form, at least.

From an accounting perspective, keep everything in Xero (or other accounting software). Every invoice, every receipt, every transfer, every everything; it should all be recorded. Your accountant can help you (though it’s pretty easy to do yourself).

I’ve formed the practice, and I think it’s a very good practice, of scanning every single document that comes my way and backing it up to the cloud (encrypted, of course). I’ll probably never need it, but damn it will be handy if I do.

Some handy hints I’ve learned the hard way:
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  • ┬áNever get behind in the accounting, it’ll just take even longer to catch up as things aren’t in memory any more. I sit down every night during the week and quickly scan in receipts and update any draft invoices (takes me about five minutes, sometimes less) and then on Friday night or over the weekend I sit down and do bank reconciliations, send invoices, deal with any paperwork, and so on (takes me about 15 minutes max, usually less).
  • Find a good accountant. They will save you money. The same goes for lawyers.
  • If you’re doing consulting work, get a lawyer to draw up a template for a contract. Contracts are good, again they will save you money. If you’re too cheap for a lawyer get a template off the Internet (though using a lawyer is better).
  • Every time you change address, or add or remove a shareholder or director (or some other scenarios), you’ll need to fill out Form 484 (“Change to company details”). Do this on time, the fees for submitting it late are horrendous.

 

Well, that’s all my advise. Hopefully it’s helpful. And again, I recommend finding a good accountant and a good lawyer. They will help you.

Xero Accounting

In July this year I embarked on a business venture with a few friends (something I’ll talk about more in a later blog post). All businesses need good accounting software – it’s how you know if you’re actually making money (and how you keep the tax office happy). I’ve used Quicken/QuickBooks and MYOB (both the desktop Accounting and FirstAccounts, as well as the online LiveAccounts) and they all leave a few things to be desired. The desktop versions of MYOB, and the versions of Quicken software that I’ve tried all have a very 1995 feel to them… and no surprise too, I don’t think the software has had a major overhaul since then. LiveAccounts worked ok for me, but it just wasn’t polished enough.

Enter Xero, a New Zealand-based company that specialises in online accounting software. I have to say, I’m impressed. We’ve been using their business product since July, and it’s great. The interface is really easy to use, I had no trouble with it at all and I’m certainly not experienced in business accounting. It hides all the details you usually don’t want, but makes them available when you do (as opposed to MYOB, which just throws every single detail ever at you and expects you to cope). The bank feeds are super reliable, updating with the latest data every night and presenting it ready to reconcile (and if a transaction doesn’t already exist, creating it is trivial). To top it all off, the Android app is incredibly polished, with a lot of thought (an example: logging in with email and password takes forever on a phone keyboard, but you don’t want to be logged in all the time, so it prompts you to create and use a 4-digit PIN).

Recently they announced automatic bank feed support for their personal product, which I had tried previously but given up on because it takes too much effort to manually transfer the data over. I’ve been using it for a couple of weeks, and while I’m impressed with the product generally, there are a few things that I find disappointing:

  • Bank feeds aren’t as reliable as in the business product. For some reason they don’t use the same functionality. This (instead of talking to the bank through an API) appears to log in to you Internet banking portal using your username and password (points off for that) and downloads the information by manually parsing the HTML. Which only seems to work about 50% of the time, and is usually three days behind what Internet banking shows you when you visit in your browser. The bank feeds work great in the business product, why not leverage on that for the personal product?
  • It’s not double-entry. This annoys me. For 90% of people single entry is ok, but it doesn’t give you the detail that double-entry does. When I transfer money from one account to another, it doesn’t appear as a transfer; it appears as a withdrawal from one and a deposit in the other. Minor, but annoying.
  • When entering values of assets and liabilities to calculate net worth, it doesn’t show you history of those items, so it’s difficult to track the value of a single item over time.

Basically, I’d love Xero Personal to be like a browser version of Quicken Personal Plus, but I think that may be a dream too far.