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  • #991280
    downhaul
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    • Total posts: 3
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    Hi everyone,

    I’ve been running an IT consultancy business for the last 5 years with no incorporated company. There is a registered trading name, but legally the business’s money and my money are the same and I only pay personal income tax.
    Turnover is well above $100k a year, but it’s mostly international and less than $5k of that is from Australian business.

    The question is whether this is the best structure. Does anyone have advice on this?

    Some potential factors include:
    – How onerous are the legal requirements of a limited company?
    – Is a limited company a better form of protection than professional indemnity insurance? I don’t have a huge amount of personal (except superannuation) or business related assets.
    – How could I use an incorporated company to reduce my tax bill?

    Thanks in advance.

    #1180742
    Alex (LegalVision)
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    Hi, downhaul!

    If you’re thinking about expanding your business, raising capital by bringing on shareholders and investors then yes incorporating your business is a good idea. Of course setting it up is more complex but easily done with the help of a small business lawyer. Registering an incorporated company with ASIC costs $497, and the annual renewal fee costs $243.

    To answer your question regarding limited liability, a company shelters or ‘veils’ it’s directors from personal liability as it is basically a separate legal identity from its directors. The law regards a company as its own legal person (or entity). So say if the company is being sued, or becomes insolvent, directors of a company have protection from creditors if the company goes into debt, unless they continue to operate the business while it is insolvent.

    The type of work that your business conducts often determines the necessity of having limited liability. Normally, if your company is transnational or represents large clientele, from a commercial perspective, incorporation is desirable.

    A limited structure, however, won’t completely shield the owners from responsibility. For example, guarantees may be personally required from proprietors seeking funding or renewed loans. In any case, you should consult a business lawyer for advice on the type of insurance you will need.

    On the subject of tax – companies are taxed at a lower rate (30%), than personal income (45%), and even consider that there are also tax benefits of streaming income through a discretionary trust (but this is a much more complicated legal structure).

    Hope that answers some of your questions, if you have any more don’t hesitate to get in touch! If you’re seriously thinking about incorporating your business then you could give us (LegalVision) a call for an obligation free consultation – we incorporate companies every day and would be happy to help!

    #1180743
    NickKaro
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    • Total posts: 226
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    downhaul, post: 210828 wrote:
    Hi everyone,

    I’ve been running an IT consultancy business for the last 5 years with no incorporated company. There is a registered trading name, but legally the business’s money and my money are the same and I only pay personal income tax.
    Turnover is well above $100k a year, but it’s mostly international and less than $5k of that is from Australian business.

    The question is whether this is the best structure. Does anyone have advice on this?

    Some potential factors include:
    – How onerous are the legal requirements of a limited company?
    – Is a limited company a better form of protection than professional indemnity insurance? I don’t have a huge amount of personal (except superannuation) or business related assets.
    – How could I use an incorporated company to reduce my tax bill?

    Thanks in advance.

    You need to be very careful around re-structuring where you are running a business and most/all of the income is generated for your professional services. There are complex tax provisions to overcome (Personal Services Income) and the ATO have also noted they may apply the General Anti-Avoidance provisions in certain fact patterns.

    I strongly suggest speaking with an expert tax lawyer and/or accountant. My firm’s details are linked below if you do want that level of expertise.

    Regards
    Nick

    #1180744
    Anonymous
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    • Total posts: 11,464
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    Hi downhaul, and welcome to the forum,

    I hope that the info provided by Alex and Nick is helpful for you as a starting point.

    Thanks for joining us,
    Jayne

    #1180745
    downhaul
    Member
    • Total posts: 3
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    Thanks for the replies so far.

    I guess my thoughts so far are quite basic. I’m not looking to have any shareholders other than myself or get a loan etc.

    It’s true that corporation tax is lower than personal income tax, but since I want to get the money to myself personally in the end anyway how will having a company benefit me?

    #1180746
    James Millar
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    • Total posts: 1,739
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    downhaul, post: 210893 wrote:
    Thanks for the replies so far.

    I guess my thoughts so far are quite basic. I’m not looking to have any shareholders other than myself or get a loan etc.

    It’s true that corporation tax is lower than personal income tax, but since I want to get the money to myself personally in the end anyway how will having a company benefit me?

    It won’t save you any tax – only defer it until you draw the funds out of the company. The 30% company tax rate applies to company profits but once they are distributed as dividends with a tax credit you end up paying the difference between your marginal rate. Or you may get a refund if your personal tax rate is below 30% in the year of receiving the franked dividend.

    It may give you some additional asset protection, additional perceived credibility and additional local business clients that only want to transact with a company for their own compliance purposes. If you are undertaking in R&D activities a company also has access to R&D concessions that no other entity gets. Possible income splitting but as stated above there is a strong possibility that both PSI and general anti avoidance provisions would strike that down.

    All that for about $2k to $3k in extra cost per annum in reporting. You need to weigh things up carefully.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1180747
    downhaul
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    Thank you James, that is very useful information.

    I can’t imagine not withdrawing money out of the business immediately.

    My customers so far haven’t shown any concern as to whether it’s an incorporated business or not.

    So apart from some protection of my personal assets, I can’t see that much is gained for the $2-3k a year. I might just review my professional indemnity insurance to make sure it’s up to the job.

    #1180748
    James Millar
    Participant
    • Total posts: 1,739
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    downhaul, post: 210944 wrote:
    Thank you James, that is very useful information.

    I can’t imagine not withdrawing money out of the business immediately.

    My customers so far haven’t shown any concern as to whether it’s an incorporated business or not.

    So apart from some protection of my personal assets, I can’t see that much is gained for the $2-3k a year. I might just review my professional indemnity insurance to make sure it’s up to the job.

    I tend to agree with that course of action. A lot of people jump into entities, either pushed by accountants or simple ignorance of the applicable law. We can all thank online incorporation platforms for that (a blessing and a curse).

    Anyway kudos for not hammering ahead before seeking guidance. You have saved yourself some money today :)

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
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