Just because a business is small, it doesn’t mean that it doesn’t have big ambitions. Many small businesses in Australia are working hard to make it big, and they’re succeeding every day.
But what exactly constitutes a ‘small business’? And how can you know if your business is too large or too small to qualify?Â
In Australia, a small business is classified as an enterprise that employs fewer than 20 people. This may include sole traders, partnerships and companies.
While there are no definitive rules about what constitutes a small business, there are some key factors to consider when deciding whether your enterprise falls into this category.
In this post, we’ll take a closer look at what counts as a small business in Australia and explore the benefits and challenges associated with running one.
The definition of a small business can differ depending on your country.
For example, in Australia, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) defines a small business as one that has less than 100 employees.Â
However, there are other ways to define a small business, depending on what criteria you use.
For example, the Australian Taxation Office (ATO) looks at turnover to determine whether a business is small or large. So, what is classed as a small business in Australia? And how do different definitions compare?
Definitions and Resources for Australian Small Businesses
According to the criteria established by the Australian Bureau of Statistics (ABS), a company is considered to be small if it has fewer than 20 employees. The following are examples of different kinds of small businesses:
- Non-employing businesses (sole proprietorships and partnerships without employees)
- Micro-businesses (businesses employing between 1 and 4 people, including non‑employing businesses)
- Other small businesses (businesses that employ between 5 and 19 employees)
The likelihood that a small firm will be owned and run independently by its founders is higher for businesses that are smaller. Small business owners and managers typically have a strong influence over day-to-day operations, are responsible for making the majority of key decisions, and provide the majority of the company’s operating capital.
The Australian Taxation Office, also known as the ATO, has its own unique perspective on what constitutes a small business.
An individual, partnership, company, or trust that is operating a business and has an aggregated turnover of less than $2 million is considered to be a small business entity by the Australian Taxation Office (ATO).
An individual’s aggregated revenue is the sum of the annual turnover generated by their present business as well as the annual turnover generated by any other businesses with which they are related or affiliated.
Be aware that a company can have a turnover of less than $2 million per year despite having 20 or more employees, whereas a company with less than 20 employees can have a turnover of more than $2 million per year despite having fewer than 20 employees.
According to the Australian Taxation Office (ATO), a micro business is one that has an annual business income of less than $2 million, whereas a small business has an annual business income that falls between $2 and $10 million.
We will be adopting the definition of small business provided by the ABS because the numbers that were utilised in the brief guide were taken from publications produced by the ABS.
What Statistics About Small Business Are Available?
The Australian Bureau of Statistics (ABS) has recently issued a variety of publications that throw light on the impact that small businesses make to the Australian economy as well as how small firms operate.
Small business employment and contribution to industry value-added
Every year, the ABS publishes the Australian Industry publication (ABS Cat. no. 8155.0), which contains estimates based on information obtained from the Business Activity Statement (BAS) that companies submit to the ATO and the Economic Activity Survey (EAS) that the ABS conducts.
Information is provided by Australian Industrial on a number of important economic indicators, including employment, pay and salaries, sales and service income, total income, total costs, operating profit before tax, and industry value added (IVA) for businesses that fall within the scope of the survey collection.
This information is broken down by business size, which is measured in terms of the number of people employed by the business.
This allows for comparisons to be made between the contributions of small, medium, and big enterprises to the total employment and total IVA in the economy during the short term as well as the longer term. IVA is the measure of the contribution made to the Gross Domestic Product by enterprises in the private sector operating within each industry (GDP).Â
According to the Australian Bureau of Statistics (ABS), gross domestic product (GDP) is defined as the total market value of goods and services produced in Australia within a given period. This value is calculated after the cost of goods and services used up in the production process have been deducted, but before allowances have been deducted for the consumption of fixed capital.
Small business count
The Australian Bureau of Statistics (ABS) also offers annual estimates of the total number of small businesses in Australia that are active, broken down by both new and existing companies (Cat. no. 8165.0).
The information presented is a snapshot of businesses that were actively trading as of the 30th of June of each year.
The Australian Taxation Office (ATO) is the source of this information, which comes from the financial records of Australian companies that have been given an Australian Business Number (ABN). After that, the information is cleaned up and filed away in the Australian Bureau of Statistics’ Australian Business Register (ABR).
There is data available on the current number of businesses that are actively trading, broken down by employee size and sector, as well as the annual number of new business starts and closures, as well as the percentage of businesses that survive their first, second, third, and fourth years in operation.Â
In addition to this, data are presented on transitions between different categories of firm size (for example, from businesses employing 1 to 4 employees to businesses employing between 5 and 19 employees). There is additional information accessible on firms according to the size of their annual turnover.
Small business exporters
The report titled “Characteristics of Australian Exporters” (ABS Catalogue Number 5368.0.55.006) offers information for the previous fiscal year regarding the characteristics and value of international trade activities of Australian enterprises broken down by business size and industry.
The Australian Bureau of Statistics’ Survey of International Trade and Services, the records kept on the Australian Border Register (ABR), and the data provided by the former Australian Customs and Border Protection Service (Customs), which has since been replaced by the Australian Border Force, are the sources of the data.
Small businesses use of information technology
The information contained in the annual report titled “Selected Characteristics of Australian Business” (ABS Catalog No. 8167.0) is derived from the replies of 6,500 enterprises to a survey.Â
This publication provides information on the rate at which businesses are connecting to the internet and other forms of social media (divided by the size of the firm), as well as the rate at which businesses are using the internet to place and receive orders, as well as advertise their products and services.
In addition to this, the magazine offers details on the types of internet connections that are utilised by companies, including Digital Subscriber Line (DSL), Fibre to the Premises (FTTP), cables, fixed wireless, mobile wireless, and satellite.
Small businesses use of flexible working arrangements
The report Selected Characteristics of Australian Business also includes information on the rate of adoption of flexible working arrangements by small businesses in Australia. These arrangements enable employees to better balance the demands of work and caring responsibilities in their personal lives. These accommodations consist of paid parental leave, flexible working hours, and caretaker leave.
Barriers to innovation for small businesses
The report “Selected Characteristics of Australian Business” offers insights into the challenges that face innovation in Australia’s small, medium, and big companies.
A lack of access to additional funds, a shortage of skilled workers, a lack of access to knowledge and technology, the impact of government regulations and the need to comply with those regulations, the requirement to adhere to standards, and an uncertain demand for new products and services are all examples of potential barriers.
Other statistics available
The report titled “Selected Characteristics of Australian Business” includes data on the percentage of businesses that are owned by foreign investors according to their size, the prevalence of franchise agreements, and the strategy that is implemented to safeguard intellectual property.
The magazine also offers information on the percentage of businesses that seek debt or equity financing and the percentage of those businesses that are successful in acquiring financing for their operations.
What Makes A Small Business Qualify?
A corporation, partnership, or single proprietorship that is privately held and has fewer employees and lower yearly income than a corporation or regular-sized business is considered to be a small business.Â
Small businesses can be sole proprietorships, partnerships, or corporations. The term “small” can mean quite different things depending on the nation in which you operate and the sector in which you work, including whether or not you are eligible for government assistance and whether or not you qualify for favourable tax policy.
The Australian Taxation Office (ATO) considers a company to be considered a “small business” if it has an annual turnover of less than $2 million combined, regardless of whether it is owned by an individual, a partnership, a corporation, or a trust. But it was before the 2016–2017 school year.
As of the first of July in 2016, the definition of a small business was altered to mean an organisation that had an annual turnover of less than ten million dollars.
The new threshold of $10 million was established in the budget for 2017/2018 to make it possible for an extra 90,000 firms to be included, which will transform and stimulate the economy.Â
According to the budget, “small enterprises are the motor room of our economy,” as they account for up to 99 percent of all businesses and contribute 380 billion dollars to the overall economy. It was emphasised that this action signified that the Australian Government aimed to cultivate an atmosphere that was conducive to the expansion of small enterprises.
On the other hand, the Australian Bureau of Statistics (ABS), which has a different definition, defines employment as the number of people who are working:
- a micro-business employs between 0-4 persons
- a small business, between 5-19 persons
- a medium business, between 20 and 199 persons; and
- a large business employing 200 or more persons
Because many of the figures and tables are taken from publications by the ABS, this article will adopt the ABS definition of “small business” to cover “micro-enterprise” as well, unless this is specifically stated elsewhere.
What Is A Small Business?
A small business can have a variety of meanings depending on the laws and regulations that govern it.
The Corporations Act 2001, which ASIC is responsible for enforcing, provides the definition of a “small proprietary company.” A “small proprietary company” will be considered “small” for the purposes of an accounting period beginning on or after 1 July 2019, if it satisfies at least two of the following criteria:
- revenue for the year totalling less than $50 million
- less than one hundred workers on the payroll at the end of the fiscal year and/or
- total assets throughout all consolidations amounting to less than $25 million at the conclusion of the financial year
If a proprietary company satisfies at least two of the following conditions for its financial year that begins before the 30th of June in 2019, the firm will be considered to be of “small” size.
- revenue for the year totalling less than $25 million
- less than fifty people working for the company at the end of the fiscal year, and/or
- gross assets across the company that were aggregated amounting to less than $12.5 million at the conclusion of the financial year.
According to the definition provided by the Australian Taxation Office, a “small business entity” is one that has an annual turnover of less than $10 million combined.
According to the criteria established by Fair Work Australia, a small business is one that has 15 workers or fewer on its payroll.
Many governing bodies adhere to the definition provided by the Australian Bureau of Statistics (ABS), which states that a small firm is one that has less than 20 employees.
Characteristics Of Innovation In The Small Business Sector
The actions that give new concepts physical form are what we mean when we talk about innovation.
In comparison to the eighty percent of large corporations that participate in creative endeavours, only forty to sixty percent of small enterprises do so.
Although the size of the company has a relatively minor impact on the level of product (goods and services) innovation, the gap between small and large businesses is most glaring in the areas of operational processes (22% vs. 44%), organisation and management (29% vs. 535), and marketing methods (26% vs. 40%).
While the level of product (goods and services) innovation has a relatively minor impact on the size of the company, it does make a relatively small difference.
Because innovation is clearly a driver of the success of those companies that succeed at the expense of the ones that do not, successful small and medium-sized businesses (SMEs) that invest in technology have a better chance of meeting the challenges of competition. Innovation also leads to increased levels of productivity.
What The Australian Taxation Office Means When They Talk About Tax Breaks
The Australian Tax Office defines a small business as an entity that has an annual turnover (excluding GST) of less than $10 million. This criterion is used to determine which businesses are eligible for tax reductions.
This sum was equivalent to a yearly turnover of $2 million in financial years prior to 2016-2017. In order to qualify for government grants intended for small businesses, applicants must meet a number of criteria, one of which is typically revenue.
A company’s location and the number of employees are two more considerations that may come into play (for state grants).
How ASIC Assists Small Business
The Australian Securities and Investment Commission (ASIC) mandates that in order to qualify as a “small proprietary company,” a business must exhibit at least two of the three qualities listed below. These include being in possession of:
- A revenue that is less than $25 million per year
- At the end of the fiscal year, there were less than fifty workers on staff.
- At the end of the fiscal year, the consolidated gross assets had an estimated value that was lower than $12.5 million.
When small enterprises do any of the following, they must deal with ASIC:
- register a company or business name
- the registration of a company or business name must be renewed every year.
- deregister a firm or delete a business name
- please report any unethical behaviour by a provider of financial products or services.
- checking other companies’ registries allows you to verify information about other companies.
Imagine if the ASIC discovers individuals or organisations that have broken the law.
If this is the case, we have the authority to bar or disqualify company directors, bar persons from working in the financial services and credit industries, and take legal action, either civil or criminal, against corporations or the executives of such firms. Learn more about the function of the ASIC.
Why Is The Definition Of A Small Business Important?
For a variety of reasons, how you categorise the size of your company is an important consideration. To start, it may have an impact on the total amount of taxes that you have to pay.
One possibility is that your company qualifies for a tax credit for small businesses.
There are also a variety of additional sorts of support that could be available to you if you run a small business, and these opportunities arise at different times (such as during a pandemic or global economic downturn).
When it comes to looking for financing, there are additional programmes that are available that are geared specifically towards the needs of small businesses.
This grants and programmes search can provide you with a wealth of information regarding the opportunities for which you could be eligible.
In addition, in comparison to larger organisations, which typically have more stringent governance policies, you, as the proprietor of a small business, have, in general, a greater degree of latitude and control over the manner in which you run your company.
Small Business Ownership Structures
It does not matter whether a firm is run as a sole proprietorship, partnership, corporation, or trust in order for it to be designated a small business. When starting your own small business, it is important to give serious consideration to the type of enterprise that is most suited to you:
Sole Trader
If you don’t need many people to help you operate your business, the easiest business structure to use is a single proprietorship. As a sole proprietor, you are still allowed to have employees, but you are responsible for adhering to all employment laws and regulations.Â
It is in your best interest to make the investment in software such as Square Team Management if you plan on hiring personnel because it will make managing a team much simpler.
In order to begin making money as a sole trader, all that is required is an ABN. You are required to register for the Goods and Services Tax (GST) if your annual income is greater than $75,000 or if you operate in specific areas, such as driving a taxi.
One of the many benefits of running a business as a single proprietor is that it grants you unrestricted authority over all aspects of the company’s operations (within the law).
The disadvantage is that you will be personally responsible for any debts or litigation that may be brought against the company.
Partnership
Although partnerships do not significantly increase the level of complexity, you will need to obtain a separate Taxpayer Identification Number for the partnership.
It is still necessary for each individual partner to file their own individual tax returns; however, you must also file a return on behalf of the partnership.
However, each partner is responsible for paying tax on their proportionate share of the partnership’s overall income. The partnership itself is exempt from paying income tax.
Partnerships are an excellent mechanism for not just sharing the profits but also sharing the costs of operating a small business.
Company
A “proprietary limited company” is the legal designation for a business in Australia (Pty Ltd). Although it is not as simple to put in place, there are some important advantages to doing so.
You will require a group of directors, a set of bylaws, a business name, business bank accounts, and a Tax File Number in order to establish a company.
When you form a company, you protect yourself from being held personally responsible for the obligations of the business. In addition, your organisation has a lot of space for development in the future.
The difficult initial setup process as well as the fact that business owners are unable to take money out of the company anytime they choose both count as potential drawbacks.Â
It has to be in the form of wages, and as a result, it is subject to the tax regulations that are currently in effect. As a firm, you are also subject to a significant increase in the number of compliance duties.
Trust
It is more difficult to establish a trust since you need to create a formal deed that outlines how you wish for the trust to function. This covers the specifics of how revenue is dispersed, as well as who is responsible for paying taxes on the income—the beneficiaries or the trust itself.
A trust is a common form of corporate organisation, but it is unquestionably more difficult to manage than a partnership.
On the plus side, you have more people participating to help set up and run the firm, but on the minus side, it is complex, and you may require the assistance of a legal professional to set up your business.
