What is a Company?

A company, unlike a sole trader or partnership, is a legal entity separate from its owners. This means that a company has its own legal rights and obligations, similar to a natural person. The debts, liabilities, and revenues of the company are not tied directly to its shareholders or directors.

As a shareholder (or member), your personal assets are protected, and you are not personally liable for the company’s debts, unless personal guarantees are given or legal obligations—such as insolvent trading—are breached. The only financial responsibility shareholders hold is to pay any outstanding balance on the value of their shares.

A key advantage of the company structure is that it shields shareholders' personal assets from business risks, though directors must still meet strict legal obligations. Companies also enjoy a fixed (and sometimes lower) income tax rate, but there may be taxation downsides, so consulting with a tax advisor is highly recommended before choosing this structure.

Key Features and Benefits of a Company

• Separate Legal Entity: A company is a separate legal entity from its owners, which offers personal asset protection.
• Limited Liability: Shareholders' liability is limited to the value of their shares, meaning personal assets are not at risk unless specific guarantees are made.
• Taxation Benefits: Companies benefit from a fixed corporate tax rate, which may be lower than the individual tax rates applicable to shareholders. There are, however, tax complexities that should be discussed with a financial advisor.
• Continuity of Business: Companies have a perpetual existence, meaning the company continues to exist even if the ownership changes.
• Potential for Growth: Companies are often more suited for businesses with long-term growth potential.

Requirements of Starting a Company

To start a company in Australia, the following requirements must be met:

• Incorporation: The company must be incorporated under the Corporations Act 2001.
• ASIC Registration: The company must be registered with the Australian Securities and Investments Commission (ASIC), which manages the registration and regulation of companies.
• GST Registration: If the company’s revenue exceeds $75,000 annually, it must apply for Goods and Services Tax (GST) registration. For non-profit organizations, the threshold is $150,000.

Company directors are required to fulfill legal and reporting obligations, which include:

• Updating ASIC with relevant business information within 28 days.
• Maintaining accurate financial records.
• Ensuring compliance with all director obligations under the Corporations Act.

Key Benefits and Requirements of a Company

• Legal Entity: The company operates as a separate legal entity from its shareholders.
• Limited Liability: Shareholders enjoy limited liability, meaning their personal assets are protected.
• Directors' Responsibilities: Directors must meet the obligations outlined in the Corporations Act 2001.
• Business Operations: While shareholders own the company, directors are responsible for managing its daily operations.
• Taxation: The company must submit an annual corporate tax return to the Australian Taxation Office (ATO).
• Annual Review: The company must complete an annual review and pay the corresponding review fee to ASIC.
• Solvency Declaration: Directors must declare the company's solvency each year.
• Profits: Profits can either be reinvested in the business or distributed as dividends to shareholders.

Potential Pitfalls of a Company

• Higher Setup Costs: Establishing a company involves higher setup and ongoing costs compared to simpler structures like sole traders or partnerships.
• No Loss Sharing: Unlike some other structures, companies cannot share losses with investors.

Other Considerations

Tax Requirements
Companies are taxed at the corporate rate on their net profits, unlike sole traders who may have a tax-free threshold. Additionally, companies do not benefit from a tax-free threshold, meaning they pay tax on every dollar earned.

Legal Requirements
Company officers and directors have legal duties under the Corporations Act, which outlines how they must perform their duties and manage the business. Directors are expected to act in the best interests of the company and its shareholders.

Choosing the Right Business Structure

When deciding on a business structure, consider the following:

• Licensing Requirements: The structure you choose determines the licenses required to operate your business.
• Tax Implications: Different structures have different tax obligations, which can affect your bottom line.
• Liability: The level of personal liability you’re willing to accept plays a key role in choosing a structure.
• Control: The amount of control you wish to maintain over your business can influence your choice of structure.
• Legal and Accounting Overheads: Companies often come with higher overheads in terms of legal and accounting requirements.

It’s important to seek advice from a professional business consultant, accountant, or lawyer to determine the most suitable structure for your business.

Business Structure Options in Australia

• Sole Trader: Simple structure with full control but personal liability for business debts.
• Company: Separate legal entity offering limited liability, but with more complexity and higher costs.
• Partnership: Involves two or more people sharing profits, losses, and liabilities.
• Trust: A trustee manages business transactions and assets for the benefit of beneficiaries.

Before making a decision, consult with a professional to ensure you choose the right structure for your business.