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Whether you’re thinking about opening your own business or you want to turn a hobby into a full-time gig, running a home business can give you more freedom and flexibility to do what you love while reducing the costs involved in renting a commercial space.
This handy guide will take you through the key elements and answer a range of questions to set you up with what you need to know when starting a home business.
What Is A Home Business?
If you run a business at or from your home, then it’s likely that you have a home business. It’s common for many small businesses – such as independent contractors, sole traders, and start-ups – to operate a home business.
What’s the difference between running a business at home versus running a business from home? A home business is run at home if you do most of the work at your home. This is most commonly seen where the place of business is the home. In contrast, home businesses are often run from home in circumstances where the home operates as a base for the business.
Choosing Your Business Structure
The business structure you choose will impact all aspects of your business – from liability and tax obligations, to hiring employees and even how you scale up the business as you grow. It may help to think about your business structure as the foundational frame of the house. Once you’ve started building the house, it can be quite tricky to go back and restructure. So it’s important to take some time to choose the best structure to suit your business needs.
There are three main business structures to consider when deciding what’s best for your business:
- Sole trader
- Partnership
- Company
Operating as a sole trader is generally the cheapest and simplest business structure to set up. As a sole trader, you run your business under your own name and Australian Business Number (ABN), but you can still employ other people to work for you. Importantly, as a sole trader, you can be held personally liable for any debts and losses your business incurs.
A partnership involves two or more people (or entities) running a business together as partners. Although partnerships are easy to set up, there are risks involved as you can be held personally liable for any debts and losses incurred by your business, as well as the decisions and activities of any of your other partners.
In contrast, a company is where one or more people create a separate legal entity as shareholders. This involves more complex and expensive processes to set up your business (for example, registering your company with ASIC) in contrast to a sole trader or partnership structure, however it means you have limited liability for your business’ debts and losses. Another benefit to adopting a company structure is that your business’ profits will be taxed separately to your own personal income and your business will be able to access a lower company tax rate.
Deciding which business structure is right for you will depend on your own individual circumstances. It is common for many people to start out as a sole trader and set up a company later down the track as the business grows. Choosing a business structure can be daunting and confusing, even when you have done research.
It’s always a good idea to speak to a lawyer, as they will be able to explain the advantages and disadvantages of each option for your own business.
Do You Need Council Approval?
In NSW, many home businesses can operate without local council approval if they meet certain criteria.
Generally speaking, your home business won’t need council approval if:
- It doesn’t impact the amenity of neighbours or cause additional disruption than what you would normally expect from a residential premises. This covers things such as noise, smells, fumes, traffic and parking, signage, waste, and more.
- You display no more than one sign identifying your business.
- Any goods sold must be produced in your home business, however there is an exception for online retail sales.
- The business does not involve:
- Home-based child care (such as family day care)
- Skin penetration procedures
- Food manufacturing
- Bed and breakfast accommodation
- Sex services
Councils have their own approval requirements and policies in place for these types of businesses, so we recommend contacting your local council for more information and guidance.
Notably, during the COVID-19 pandemic, home businesses may have no more than five employees (other than those living in at the residence), provided they can abide by social distancing rules. This measure is in place until 31 March 2022.
If you’re not sure if your home business needs council approval, it’s a good idea to contact your local council or check their Local Environmental Plan to find out the specific approval requirements for home businesses in your local government area.
Licences And Registration
When you set up and run a home business, you may need to comply with specific registration and licensing requirements based on what type of business you operate and where you are.
Register For An ABN
Depending on what business structure you choose, you may need to apply for an ABN. Your ABN is a unique 11-digit number that will help to identify your business within the community and to the government. Having an ABN also means you can register an Australian domain name and access certain business credits and grants.
Register Your Business Name
If you conduct business using a name that is different to your own, you will need to register your business name with the Business Registration Service. Before registering a business name, you’ll need an ABN (or ABN application number).
For sole traders or businesses set up under a partnership structure, you may choose to either trade under your own name or register a business name. In contrast, companies are required to register a business name.
Before registering your business name, it’s a good idea to run a search on ASIC’s business name register and IP Australia to make sure it is not already in use.
You can read more about how to register your business name here.
Licenses
Depending on what type of business you are running, you may need to apply for a license with the Australian Business Licence and Information Service (ABLIS).
The ABLIS website has a useful tool that can help you find out what licenses or other requirements you’ll need to comply with when running your home business.
What Are Your Tax Obligations?
Working out your tax obligations can be a complex task, especially when you are operating a business from home. It may be helpful to speak to an accountant or tax lawyer to get advice specific to your own circumstances.
Whether you have chosen to operate as a sole trader, partnership or company, you will need to have a tax file number (TFN) to make sure you are taxed correctly and avoid any legal penalties.
Some of the taxes you may need to be aware of, and register for, include:
| Goods and services tax (GST) | GST is a broad-based tax of 10% that applies to most goods and services sold and consumed in Australia Registering for GST is compulsory if your business has an annual turnover of $75,000 or more |
| Pay as you go (PAYG) withholding | If you are an employer, you have an obligation to help your employees meet their tax liabilities. This is done through PAYG withholding – a process in which you withhold amounts from payments you make to your employees, as well as contractors you have a voluntary agreement with |
| Fringe benefits tax (FBT) | If you provide benefits to your employees (other than their statutory wages and entitlements), you may need to pay FBT on these benefits. Benefits may include things such as:Gym membershipsSalary sacrifice arrangementsCompany carDiscounted or low interest loansFree tickets to concerts or other events |
More specifically, as a home business owner, there are some potential tax liabilities and deductions that you should be aware of.
Liabilities
Landowners that operate a home business may need to pay:
- Land tax
- Capital gains tax (if you sell the property from which you are operating your home business)
Deductions
You may be able to claim deductions on the following business expenses:
| Running expenses | These are costs related to running the business. For example:ElectricityPhoneCleaningUse of printer consumables (e.g. ink and toner cartridges)Decline in value of plan and equipmentFurniture |
| Occupancy expenses | These are costs related to occupying the building the business operates in. You may be able to claim a share of these expenses as they relate to your business. For example:RentInterest on your mortgageInsurance premiumsCouncil rates |
To find out more about the deductions you may claim in relation to your home business on the ATO website here.
Can You Put Up A Sign To Advertise Your Business?
Putting up a sign for your home business can help attract new customers and clients. The sign can display your business’ details and basic information, but it must not include any type of advertising for goods, products or services. In addition to this, you may only display one sign.
Your sign may include details such as:
- Your name or the name of your business
- What type of business it is
- Your phone number and address
- Hours of operation
- Your business’ logo
If you are in a residential zone, your sign must not be illuminated. In contrast, in business or industrial zones, your sign may be illuminated between 7am and 10pm, but cannot be animated, flashing or moving.
There are three types of business signs you can choose from:
- Building signs
- Wall signs
- Window signs
| Type of sign | General requirements |
| Building signs | Must not be more than 2.5m2 in areaMust be mounted flat against an exterior wall or parapet, but can’t protrude more than 30cm from the face of the wall or parapet Must not be higher than the parapet or eaves of the building, or 15m above ground level (whichever is lower) |
| Wall signs | Must not be more than 1m2 in area in a residential zoneMust be attached to the building of the business identified by the sign by painting or mounting it flat on an exterior wall of the building, boundary fence or wallMust not be more than 2.5m above ground level or project beyond the parapet or eaves of the building to which it is attached |
| Window signs | The maximum area of the sign is the smaller of either 20% of the surface of the window in which it is displayed or 6m2 Must be inside of any window of the existing buildingMust not be illuminated |
Can You Run Your Business From A Rental Home?
If you’re living in a rental property and are considering starting a home business, be sure to check your residential tenancy agreement (i.e. your lease) first. Your lease may prohibit you from using the property for anything other than residential purposes.
If not, you may need to obtain the permission of your landlord before you start using the premises for your home business, as well as before displaying any signage.
Some additional things to consider when starting a home business from a rental property:
- Your rights under the Residential Tenancies Act 2010 (NSW) (or relevant state and territory legislation) may be altered or affected if living at the property is not its primary use.
- If you damage the property while operating your home business, you may not be able to claim your bond back.
Do I Need Insurance?
Having the right insurance can reduce uncertainty and give you peace at mind by helping to protect your business, customers, and livelihood, when it comes to things that are out of your control.
The type of insurance that will be right for you will depend on the type of business you operate. As a home business owner, it is important to review your current home and contents insurance policy. Many of these policies may be for residential use only, meaning that your business activities and assets may not be protected. Speaking to an insurance specialist, such as our friends over at BizCover, can help you find the best cover for your situation
Some forms of insurance are compulsory in Australia, depending on the type and size of your business:
- Workers’ compensation insurance is compulsory if you have employees
- Public liability insurance is compulsory for certain types of businesses
- Compulsory third party insurance is compulsory if you own a vehicle
Note: each State and Territory administers their own insurance schemes and will have their own requirements under their schemes.
What Do I Do If I Want To Close Or Sell My Business?
There are many a range of reasons why you may want to close or sell your business, from a change in your situation and wanting to retire, to being impacted by a natural disaster or a pandemic.
Whatever the reason, it can be a big decision to make. Depending on your situation, you may want to speak to a lawyer to discuss your options, such as:
- Getting financial support or funding to continue running your business
- Pausing your business temporarily
- Adapting your business
- Passing your business on to someone else using a succession plan
Selling Your Business
If you decide to sell your business, you may want to speak to a business valuation specialist to assess the potential value of your business and publicise the offer of sale.
You will also need to decide whether you want to sell your business’ assets (such as any stock, equipment, or licenses). If you choose to sell your assets, be sure to consider whether you need to pay GST or capital gains tax.
You may also need to transfer the business name through ASIC, as well as any licenses and social media logins you may have, if the new owner wishes to use it.
Closing Your Business
There are several steps to take to make sure you meet your legal and non-legal obligations when it comes to closing your business.
Business Registrations
You’ll need to cancel your business name and deregister your company with ASIC. It’s important to note that, even if you stop trading, you will need to keep up with your legal obligations as a company until it’s deregistered!
Tax Obligations
Your tax obligations will depend on your own situation and the type of business you have, so it’s a good idea to get advice from the ATO or other tax professional. Some things you might need to take care of include making GST adjustments on your final activity statement, lodging and paying activity statements, and lodging your final tax return and Single Touch Payroll (STP) data.
You will also need to notify the ATO after you close your business. After your last day running the business, there are some key tasks and dates to keep in mind:
- Cancelling your GST registration within 21 days
- Cancelling your ABN within 28 days
Taking Care Of Your Employees
If your business has employees, you’ll need to let them know about your intention to close the business and prepare their final pay. This includes any outstanding wages, leave and other entitlements (such as redundancy payments and payments in lieu of notice).
Depending on your business, you may also need to consider:
- Notifying your local council of your intention to close the business (only necessary for certain types of businesses)
- Cancelling any insurance policies
- Cancelling any licenses or permits you may have
- Closing any social media accounts
- Letting your suppliers and customers know that you are closing the business
Where To Now?
Opening and running a home business can be a big task, and it’s one you want to get right from the get-go! That’s why it’s always a good idea to seek advice that is specific to your own circumstances. No matter what stage you’re at with your business, we have a team of friendly lawyers who are ready to help!
Give us a call on 1800 730 617 or shoot us an email at team@sprintlaw.com.au for a free, no-obligations chat.
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