Australia is comparatively informal about allowing its citizens to set up a business. There are few requirements to fulfil, apart from some simple registrations and giving the government your money. No matter what your eduction, training or experience, you are generally entitled to set up a business. And this might also explain why there are so many business failures.
Setting up as a professional photographer, with or without your own studio, really only requires you to know how to use a camera. However, being good with a camera is no guarantee you'll be good as a professional photographer. In this new series, we'll look at a range of basic business issues. While they won't replace a good adviser or the school of hard knocks (experience), hopefully they'll alert you to a number of issues to consider when you set up on your own.
When somebody ‘goes into business', they are not an employee. They are hired or paid by their clients or customers and are said to be ‘running a business'.
While this business might appear to be separate from the person who runs it, there are some legal considerations that affect who is responsible for the business, how much responsibility they assume, and how they will pay income tax.
There are four basic business structures:
A sole trader is the most basic business structure. Most photographers when they begin business start as a sole trader.
A sole trader is just an individual who decides to run a business. A sole trader will probably have an ABN and be registered for GST. Although they might consider the business to be separate from themselves, in law they are one and the same. The sole trader is the same as the business.
Being a sole trader means you can't escape responsibility for the actions (or inaction) of your business. You are liable.
For instance, in a larger business, if an employee ruins a shoot, then it's the boss or employer who has to arrange a re-shoot or refund the money to the client. Yes, it might end up being the same employee who actually fixes up the problem, but it's the employer who takes responsiblity. The employee will still be paid (although the employee could also be fired if his or her work isn't up to scratch - so ultimately there still is some responsibility).
Sole traders are fully responsible or ‘liable' for the work they do as a photographer. If a bride and groom aren't happy with the shoot, they could refuse to pay and possibly demand compensation. An advertising agency unhappy with a shoot could also refuse to pay and perhaps demand compensation if the problem lay with the photographer.
Small problems happen all the time and the best way to solve them is through sensible negotiation. In such situations, the responsibility isn't a big issue and so if you mess up, there are no huge dramas. No one ever died from having a bad photo taken!
However, let's look at a slightly different scenario - a wedding that doesn't come out or is lost, or a commercial job where your photos are used and the client's entire print job is rejected because of poor digital files. Such scenarios could costs tens or hundreds of thousands of dollars to remedy. As a sole trader, it is your responsibility. In theory, you could be sued and even be bankrupted to repay the debt.
In summary, sole traders shoulder the full liability of running their businesses. If they don't own many assets (for instance, they are young and don't yet own their own home), then they have nothing to lose and being a sole trader is suitable. On the other hand, if a photographer has significant assets outside the business, a different structure would be safer.
In terms of income tax, a sole trader is taxed on the profit generated by the business, not what the business pays the photographer. So, you might decide to pay yourself $30,000 a year as a ‘salary' from the business, but if the business generates a profit of $45,000 (including the $30,000 salary), the sole trader will be taxed on $45,000.
Partnerships have the same liability (responsibility) issues as sole traders. They are also taxed on the profit of the business in the same way, but the income is split between the partners. If the partners are also married, this can be a good way of saving income tax for the family unit and is a standard income tax strategy.
Partnerships are simpler and less expensive to administrate than companies, but might not be the best structure for two unrelated photographers to use. A company or trust structure is usually better.
A company is a separate legal entity. This means that the company is a different ‘person' from the photographer. This can be useful in limiting the amount of liability the business carries.
For instance, if a photographer operates through a company and the company is sued for poor or defective work, if the company can't afford to fix up the work or pay compensation, all that happens is the company is put into receivership or ‘wound up'. If there isn't enough money to pay, that's tough luck for the client. The photographer's house and other assets cannot be used to cover the liability (although all the cameras and computers owned by the company would be lost).
This is a very generalised statement because a client could sue both the company and the photographer individually, but as it stands
today, having a company certainly makes it a lot harder for a client to get to your personal assets. A company protects your wealth better.
Companies are also taxed differently to individuals. This may or may not make a difference to the amount of tax you pay.
An individual pays tax at up to 48.5%; a company pays tax at a flat rate of 30%. However, to get the money out of the company and into the individuals' hands, salaries or dividends are paid and these are then taxed at individual rates. If you're taking all of the profits from your business out of the company and into your own hands, there is very little tax advantage, if any.
One big tax advantage comes when the company gets to spend its profits. For instance, to buy a $50,000 camera outfit, an individual needs to earn around $100,000. After tax at up to $48,500, there's enough left over to purchase the camera outfit. For a company, if it earned $100,000, it would only pay $30,000 and have $70,000 available to purchase new equipment.
There can be other tax advantages (such as superannuation deductions, travel allowances, FBT loopholes), but these are usually minor and are sometimes offset by the costs of setting up and administering a company.
While a sole trader can be set up for under $200, a partnership for not much more, a company will cost $1100 plus. Then each year a company will cost at least $1000 more in accounting fees than a partnership or sole trader (these are generalisations).
A trust is another structure which usually requires a company to act as the ‘trustee'. A trust set up correctly can have most of the advantages of a company, yet has more flexibility in distributing income.
To set up a trust or company, you definitely need professional advice - and really, to set up a business good advice early on can be invaluable.
The information in this article is general in nature and should not replace personal advice given by your own legal and financial advisers.