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Small businesses form a huge part of Australia’s economy. In 2016, the Australian Bureau of Statistics confirmed that small businesses employ 97% of working Australians. Small to medium (SMB) enterprises also contribute $614.96 billion to Australia’s GDP, which is 57% of the total GDP.
On a local level, small businesses are incredibly important for families and communities. They employ locals, support families, sponsor community groups and help to put money back into the local economy.
What is a small business?
There are many different definitions of a small business. Even within the Australian government alone, different departments apply different rules when determining if a business is ‘small’. Under most definitions, it doesn’t matter whether your company structure is that of a sole trader, partnership, company or trust. All of these can be considered small businesses if they meet certain criteria.
Listed below are some of the definitions applied by key regulatory bodies in Australia.
1. ABS small business definition
The Australian Bureau of Statistics views a small business as having fewer than 20 employees, and can generally be sorted into three categories:
Non-employing businesses: This includes sole traders and partnerships with no employees.
Micro-businesses: A small business employing between 1-4 people.
Other small businesses: A business that employs 5-19 staff.
2. ATO small business definition
The ATO has a much broader view of what is considered a small business. Under the ATO definition, a small business can be any of the following:
The ATO’s definition states that the business must have less than $10 million in aggregated turnover. It should be noted, however, that to qualify for a ‘small business tax offset’, you need to have an aggregated turnover of less than $5 million.
3. ASIC small business definition
ASIC agrees with the ATO’s definition that a small business may be a sole trader, partnership, company or trust. However, to qualify as a small business under the Corporations Act 2001, which ASIC administers, a business must meet two of the following criteria:
The consolidated revenue of the business and any other entities it controls must be under $50 million;
The value of consolidated gross assets for the business and entities it controls is under $25 million; and/or
The business and entities it controls have under 100 employees
4. Fair Work Commission small business definition
The Fair Work Commission also has a definition for small businesses, and unlike ASIC and the ATO who apply the criteria for each financial year, Fair Work looks at the business circumstances at the time of an event they need to investigate, such as unfair dismissal.
According to the Fair Work Commission, a small business is any business with fewer than 15 employees.
Why does the small business’s size definition matter?
The definition of your business’s size matters for a number of reasons. Firstly, it can affect the amount of tax you pay. For example, you may be eligible for a small business tax offset. There are also other forms of assistance you may be eligible for as a small business, and these are offered at various times (such as during a pandemic or global economic downturn).
When seeking finance, there are also schemes available targeted to small businesses. This grants and programs finder can give you plenty of information on what you may be eligible for. Also, as a small business owner, you generally have more freedom and control over how you operate your business when compared to larger companies that have strict governance policies.
Forms of small business ownership
A business can be considered small regardless of whether it is a sole trader, partnership, company or trust. When setting up your small business, consider carefully which business type suits you best:
1. Sole Trader
A sole trader is the simplest structure if you don’t need many employees to help run your business. You can still have employees as sole traders, but you need to follow all applicable employment guidelines. If you do choose to hire employees, it pays to invest in software such as Square Team Management, which makes the administration side of running a team much easier. A sole trader only requires an ABN in order to start earning. If you earn over $75,000 per year or work in certain industries such as taxi driving, you’ll need to register for GST too.
The great thing about being a sole trader is you have total control over the business and can operate however you like (within the law). The negative is that you’re also personally liable for any business debts or lawsuits if they arise.
Partnerships aren’t much more complicated, however, you need a separate Tax File Number for the partnership. Each individual partner still lodges personal tax returns, but you must also complete one for the partnership. The partnership itself doesn’t pay tax on income, however, each partner pays tax on their share of the income.
Partnerships are great for sharing income, and also sharing the expenses of running a small business.
In Australia, a company is known as a ‘proprietary limited company (Pty Ltd). It’s not as easy to set up, however, there are some significant benefits. To set up a company you need a set of bylaws, directors, a business name, business bank accounts and a Tax File Number.
A benefit of setting up a company is that you’re not personally liable for your company’s debts. Plus, you have a lot of room to grow as a company. A drawback may be the complicated setup process and the fact that company owners can’t withdraw money from the business whenever they want. It needs to be in the form of wages and is therefore subject to applicable tax laws. There are also many more compliance obligations as a company.
Setting up a trust is more complicated because you require a formal deed outlining how you intend to operate. This includes details of how income is distributed, and whether the trust or the beneficiaries pay tax on the income.
A trust is a popular type of business, but it’s certainly more complicated than a partnership. On the plus side, you have more people involved to help set up and run the business, but on the negative side, it’s complex and you may require legal advice to set up your business.
How Square Loans can help small businesses
Square Loans offers financial support to businesses outside of the traditional lenders. Square is here to empower business owners, which is why our loans put the ball back in your court.
Square’s small business customers are eligible for certain loan amounts based on your regular sales income. Repayments are made directly from your daily credit/debit card sales based on a percentage. So, if you have a slow day, you pay less off your loan. On good days, you pay a little more. It’s convenient, cost-effective and works with your individual circumstances.