If you are looking to start a new business one of your first steps should be to determine the most appropriate trading structure through which to operate the business.
The most common trading structures in Australia are that of a sole trader, a partnership, a company or a trust, or a combination of these. Each of these options presents its own advantages and disadvantages. In this post, I discuss the pros and cons to setup a company.
What is a company and why setup a company?
The law in Australia regards a company as a distinct legal entity separate from the individuals who act as its shareholders or directors. Like any individual person a company can own property and can sue and be sued.
The most common types of companies are public companies, which are usually formed to raise or borrow public money through listing the company’s shares for trading on a stock exchange, or private companies, which do not and cannot raise money from the general public through share issues. Most small businesses operate as private companies.
Advantages of a company
The key advantages to operating your business through a company structure are as follows:
- Limited liability – One of the biggest advantages of the company structure is that the legal liability of your company’s shareholders is limited to their share capital (that is, how much money they pay for their shares in the company). This means that in most cases the personal assets of shareholders cannot be seized to pay company debts.
- Pay less tax – Companies will generally pay less tax than other business structures such as sole traders or partnerships. Companies are taxed on their profits at the company tax rate (30%), which may be lower than the marginal tax rates of its individual shareholders. When shareholders receive company dividends that the company has already paid tax on, they will often receive tax credits through the company imputation tax system.
- Perpetual Succession – A company structure can ensure continuity of management and ownership in the event of the death or disability of key people in the business because shares in companies can be transferred.
- Control – You can use a company structure to effectively separate the management and ownership aspects of the business. For example, the managers of the business can be appointed directors of the business. The owners of the business are its shareholders.
- Jurisdiction –Once your company is registered in one state of Australia it’s free to trade in all states provided your Australian Business Number is on all business stationery.
Disadvantages of a company
The key disadvantages to operating your business through a company structure are as follows:
- Operating costs – There are ongoing costs of compliance with the Corporations Act. These include costs of preparing and submitting annual statements, keeping ASIC informed of any changes to the company’s structure, officeholders or operations, and any fees for accounting and legal services.
- Responsibilities of directors – The directors of the company have certain legal obligations. If directors fail to meet these obligations they may be held personally liable for the debts and liabilities of the company.
There may be other advantages and disadvantages to using a company structure for your business. They depend on the specific nature of your business and other aspects of your personal financial affairs.
You should always obtain legal, accounting and financial advice before choosing the best trading entity structure to suit your business.
Please contact me if you have any questions regarding company structures or if you wish to setup a company.