Registered companies are the most common and well understood entities for carrying on a business. But is this structure best for your business in terms of costs, tax and legal obligations?
Running your business as a company allows your business to operate as a separate legal entity that is capable of holding assets in its own name. The two main participants in a company are the shareholders (the owners who put capital into the business) and the directors. Whether private or proprietary, companies have no more than 50 non-employee shareholders and cannot issue a prospectus or sell shares to the general public.
Flat tax rate: Companies are taxed at a flat rate of 30 per cent, which could save you money on tax. Consider the following: A sole trader and a company both made a net profit of $180,000 for the financial year. As a sole trader, your taxation liability is $54,547 (see ATO 2012–13 tax rates). Under a company, the taxation liability is $54,000 (30 per cent of $180,000) Therefore, if you anticipate your business to turnover more than $180,000 net profit each financial year, you’ll save money on tax under a company structure rather than a sole trader or partnership structure.
Limited liability: Shareholders in a company only have limited liability, meaning that if the company doesn’t have enough money or assets to pay debts, the shareholders won’t be held personally liable for them. Also, only the company can be sued, not the shareholders. Directors, on the other hand, can be held personally liable for debts of the company.
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Capital is normally easier to raise: Access to bank credit is easier than other types of business organisations.
Easy transfer of ownership: Companies have a continuity of existence independent of its owners – this makes the business is easier to transfer and shares easy to sell to the new owners.
Can be expensive: The cost of establishing a company is high, and the commercial cost of maintaining the corporate entity can also be quite considerable. If the company should ever be wound-up (dissolved), the cost of doing so is also expensive, not to mention complicated.
Complex: The reporting requirements for a company can be quite complex. Companies are governed by the Corporations Act, so there are strict rules in regards to how a company and its officers should behave.
Higher level of requirement: The business tax reporting requirements for companies are far greater than for sole traders and partnerships. Annual and other returns need to be provided to the Australian Securities and Investment Commission (ASIC).
No capital gains tax (CGT) discount: Companies cannot claim 50 per cent CGT discount on sale of assets. It is also more difficult to access CGT concessions on the sale of the business under this structure.
It’s important you get your business off to the right start by choosing the structure that suits your needs.