The differences between an ACN and ABN explained
Samir Kamnani
·June 14, 2024
Launching a new ecommerce business in Australia? Before you get started selling, it’s important to make things official.
That means your first priority should be registering your business, which will ensure that the Australian government recognises your business and allows you to operate legally. In order to register your business, you will need to determine the legal structure of your company and choose a business name.
When determining your business’ legal structure, you have several options to choose from: sole proprietorship, partnership, or company.
Regardless of which business structure you decide, you’ll need to register for an Australian Business Number (ABN). But if you elect to become a company, you’ll also need an Australian Company Number (ACN). In this article, we’ll review the differences between an ABN and ACN, and why each number is important.
What is an ABN?
An ABN is a unique 11-digit number used to identify your business to the government and other businesses that demonstrates your legal right to operate, and is treated similarly to a tax identification number in other countries.
Registering for an ABN is a crucial step in starting any business in Australia, regardless of the business structure you choose. Having an ABN allows you to claim goods and services tax (GST) credits, register for pay as you go withholding (PAYG), and receive payments from customers.
If you’re a sole trader, you’re not legally required to obtain an ABN—but there are many benefits and few downsides. Having an ABN enables you to easily track profits and expenses that are tied to your business enterprise. This makes it easier to separate your business profits and losses from other earned income, which will simplify accounting.
Possessing an ABN can significantly enhance your cash flow. Lacking an ABN prevents you from claiming immediate pay-as-you-go credits for GST on business expenses. While these credits can still be claimed on your tax return, paying these taxes upfront can hinder your growth potential by restricting cash flow until the end of the financial year.
However you plan on operating your business, it’s smart to register for your ABN as soon as you have a business plan and are ready to launch. The process to obtain an ABN is quick, simple, and free, and can be completed through the Australian Business Register’s website.
What is an ACN?
As opposed to an ABN, which every Australian business enterprise is required to have, an ACN only applies to businesses that intend to operate as separate legal entities, or companies. An ACN is a unique nine-digit number assigned by the Australian Securities and Investments Commission (ASIC) to identify each company registered in Australia.
Registering your business as a company—as opposed to a sole trader or partnership—requires more legal paperwork, but also offers a greater degree of separation between your personal and business assets and liabilities. This can provide protection for your personal assets in the event of legal issues or financial difficulties within your business.
Another benefit of registering as a company is access to various tax benefits and deductions. While sole traders will be subject to a progressive tax rate of up to 45% that factors in both their personal and business income, companies are taxed at a flat rate of 25%, as long as annual turnover is less than $50 million. This can help you realise significant savings, particularly if your non-business income would put you in a higher tax bracket.
You may also be eligible for certain tax breaks which can save your business money in the long run. It’s important to consult with a tax professional to determine what benefits your company may qualify for.
Registering as a company also allows you to establish a legal framework for operations. This includes setting up contracts, creating a clear ownership structure, and establishing protocols for decision-making processes within the company. Having these procedures in place can help prevent disputes or conflicts between partners or shareholders, and ensure that equity is shared according to your business agreement.
To obtain an ACN, you must first register your company with ASIC. This can be done online through their website or by mail. Once registered, you will receive a Certificate of Incorporation which includes your unique ACN.
It is important to note that an ACN does not replace the need for an ABN, as both numbers serve different purposes. The ACN is generally used as the base number for your ABN, so they will be the same except for the two additional digits at the end of your ABN.
Growing your ecommerce business
The final step in setting up an ecommerce business is registering for goods and services tax (GST). This will allow you to collect the 10% tax on goods and services when selling products to customers throughout Australia. You’re not required to register until you’ve reached a sales threshold of $75,000 annually, but it’s advisable to do so as soon as you set up your business. This will save you the hassle of tracking your eligibility on a monthly basis.
Some products, such as certain foods, medical products, and educational services, are exempt from GST, and you’ll be able to mark these product categories as exempt within your ecommerce shop. Non-Australian customers are also exempt from paying GST, though it is important to track whether you’re responsible for collecting any other taxes when shipping internationally. Using an ecommerce platform like Shopify Plus can help you automate the process of collecting taxes on both domestic and international orders to help you remain in compliance with relevant tax authorities.
As you launch your ecommerce shop, make sure that you’re prioritising the customer experience. By promoting high-quality products and developing a streamlined workflow for managing orders and customer support, you’ll be able to instill confidence in your customers. It’s important to note that customers don’t always find the right fit on the first try, so using a best-in-class returns management portal can help you retain revenue by optimising for flexible exchange options. By encouraging exchanges, you’ll be able to boost revenue retention and customer loyalty, helping you set the path for a sustainable business.
Learn how Loop can help you with Australian returns management.
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