You’ve either been operating as a sole trader for a while or you’re about to embark on the entrepreneur journey. You’ve heard about companies, but is it worthwhile?
A company is an entity which has a separate legal existence to its own. This means it can incur debts, sue and be sued separately from its owners. The owners are shareholders and the company is managed by its officers – Directors and Company Secretaries. If the company fails, any liabilities are paid out only to the extent of the assets of the company and members liability is limited to the nominal (face value) amount of their shares – hence the term “limited liability”.
There are two main types of company in Australia: Private (proprietary) and Public. A private company will include “PTY” in its name. Both types of company will include “LTD” in the name in recognition of its limited liability status.
A proprietary company must have a minimum of 1 member and 1 director who must ordinarily live in Australia. It doesn’t need to be audited; can have a maximum of 50 non-employee shareholders and is unlisted (that is cannot be sold on the Australian Stock Exchange).
A public company must have at least three Directors; maintain a Company Secretary and there is no limit on the number of shareholders. A public company can be listed on the ASX although it does not need to be. It is also able to raise capital directly from the public. As a result of this, a public company must prepare and submit financial information to shareholders and regulators every year.
All companies in Australia are regulated by the Australian Securities and Investment Commission (ASIC).
A private company is a very common structure for small business. The following are the reasons why you might decide to incorporate:
Asset protection. Provided a director acts in accordance with the Law, the assets of directors and shareholders cannot be accessed to settle the debts of the company.
Set tax rate. Companies are taxed at a maximum of 30% (or 27.5% for small companies).
Retention of profit. Profits of the company do not need to be distributed. They can be held in the company indefinitely.
Payment of dividends. Profits can be distributed at the discretion of directors in the form of dividends. If the company has paid tax, they can have franking credits attached which means tax won’t be paid twice.
Separation of employees. A director can also be an employee and therefore can be covered by workers compensation insurance, be paid a wage and have superannuation guarantee paid on their behalf.
On the other hand, there are some disadvantages:
Set up costs. They are more expensive to set up as companies must be registered with ASIC.
Increased ongoing costs. ASIC requires the maintenance of appropriate records including financial and minutes of all decisions made. As a separate legal entity, a company must lodge a tax return with the Tax Office.
Directors. There must be at least 1 Director over the age of 18 and who resides in Australia.
Distribution of profit. Company profits can only be distributed to a shareholder.
Responsibility of directors. A director has a fiduciary duty to act lawfully and in the best interests of the company. If they don’t they can be sued.
Capital Gains Tax. A company is not entitled to a discount on capital gains (individuals receive a 50% reduction if they have held an asset for more than 12 months).
A company can be established at any time, not just when you are starting the business. For small business, there are concessions available if you decide to incorporate after operating for a period of time. If you would like to know more about whether a company is the right structure for you, I’m more than happy to chat with you and offer a FREE 30 minute initial consultation. You can easily book online here and I look forward to helping you sort your finances!