Unlike a sole trader or partnership structure, a company is a legal entity in its own right. A company has entitlements and obligations similar to those of a natural person. The debts it incurs and the revenue it receives are those of the company rather than its shareholders or directors.
As a member (or shareholder), you are not liable for the company’s debts (in your capacity as a member). If you are called upon to do so, your only financial obligation is to pay the company the outstanding balance due on the issued value of your shares.
The company also shields the personal assets of the shareholders from the consequences of its trading activities. The exceptions to this is where directors are in breach of some fundamental legal obligations (eg insolvent trading) or where directors give personal guarantees to creditors .
The financial benefits of a company structure include a fixed (sometimes lower) income tax rate than that which might be applicable to its shareholders. Equally there are some potential taxation downsides which should be discussed with your accountant or financial advisor before deciding to adopt this type of business vehicle.
Companies are slightly more expensive than partnerships to set up and annual fees are payable in respect of their registration. They are generally suited to people who expect their business to grow and operate successfully well into the future.
A company also has additional reporting costs which will result in slightly higher annual accounting fees.
A registered company must have at least one director (and a company secretary unless it is a private company). A director is responsible for managing the company’s business activities. – Business.gov.au
Requirements of starting a Company
To become a company, an entity must:
- be incorporated under the Corporations Act 2001
- be registered with the Australian Securities and Investment Commission (ASIC).
Further information about starting a business can be found on the website of ASIC. If your revenue is $75,000 or higher, the company must apply for the Goods and Services Tax (GST). Non-profit organisations ‘ tax requirement is $150,000. More detailed information about your tax obligations as a company is available from the Australian Taxation Office (ATO).
Organisations and directors are expected to meet significant legal and reporting requirements. Some of the more common responsibilities include:
- Update ASIC to relevant business information within 28 days;
- Maintain financial records;
- Understand and fulfil all of your obligations as Director.
What are the benefits and requirements of a Company?
Whether you are looking to start your business as a company, there are key features you should know:
- A company is a legal entity in its own right;
- Shareholders enjoy limited liability;
- Requires directors to meet all of the Corporations Act 2001 obligations;
- Business operations are managed by directors who can be controlled by shareholders;
- Revenue earned by the company belongs to the company;
- Annual corporate tax return to be submitted to ATO;
- Requires an annual review to be completed and an annual review fee to be paid to ASIC;
- Every year, company directors are required to complete a solvency declaration;
- Can carry forward losses indefinitely to offset against future profits;
- Profits can be reinvested in the business or paid as dividends to shareholders.
Potential pitfalls of a Company
- A company has higher set-up and running costs compared to other structures;
- Can’t spread losses to investors.
Other factors to consider
A company’s tax requirements vary from those of other business structures. A company pays income tax at the company rate of income tax on its net profits. For companies, there is no tax-free threshold and tax is paid on every dollar earned.
For more information regarding your tax obligations as a company visit the ATO website.
Company officers and directors have legal duties specifying how they perform their duties and manage the business of the company. These obligations are described in the Corporations Act.
Choosing the right business structure – Is Partnership the right option?
Choose the one that best suits your business needs when you settle on a framework for your company. Research that choice carefully, as for each system there are key factors and rules to research. The structure of your business will determine:
- The licences that the business will need;
- How much tax the business will pay;
- Whether you are an employee (in the case of a company director) or a business owner;
- Your potential future responsibility;
- How much control you have over the business;
- Extent of ongoing legal and accounting overheads for the business.
You can choose from a number of structures when you start or expand your business. Australia’s four most common types of business structures are:
- Sole trader – The simplest structure allows you to have full control;
- Company – More complex, your liability is limited because it is a separate legal entity;
- Partnerships – Consisting of 2 or more suppliers with profits or losses;
- Trust – Where a trustee is in charge of business transactions.
Seek advice from a professional business consultant, business structure lawyer or accountant before deciding which business structure to use.