If you want your business to grow swiftly and obtain insurance on your assets, then a company business is the right option for you.
While being the only member/director in your company with a minimum of one shareowner, a company structure allows multiple shareholders to run its day-to-day operations along with the directors.
Having a company structure may assist in taxes. However, companies tend to be incredibly expensive to set up and require you to have an extensive understanding of Australian laws and your liabilities before starting it.
What benefits will you receive?
Company tax rate:
With the tax on company income only at 30% and where the corporation handles the tax payments on the profit earned, it is more convenient than paying taxes on personal income. This way, you can take out whatever private funds you need without paying tax on them.
You’ll be responsible solely for your share of the company and the other investors will be responsible for their shares. Conversely, if you were the sole owner of the company, things would be different.
You can sell shares in between your family and hence, the profits received will stay in the family.
What about the shortcomings?
You’re still held responsible for specific circumstances.
There is a false belief that if the business goes down or the company faces a huge loss, the director or shareholders will not be influenced by it. This is not the case because your assets are not insured if you have an enterprise.
As per the Australian Securities and Investments Commission (ASIC) law, under the Corporations Act 2001, directors of Private owned (limited), Private owned (unlimited), and Public companies can be held accountable for reasons involving a violation of the law such as:
- Cases of bankruptcy
- Damages suffered due to the director not fulfilling his duties.
- If your company has a trust fund and the director is the trustee, then in cases of unpaid loans.
- Many more illegal activities are banned and hold a director responsible under this legislation. Phoenix activity is one of those.
- A company has the right to file a case and can have a lawsuit filed against them.
- If you have insurance on your shares, you can protect yourself from future liabilities. However, if the insurance coverage is not vast enough to cover your loss, you will bear the responsibility.
Do I have the option of being a no liability company?
Only if you have a mining company or if your business is related to oil refining, then you will qualify for having a no liability company.
What other disadvantages does the company business structure have?
- The overall cost of creating the business and operational costs are higher.
- Higher ATO reports required by the Government.
- Tax becomes applicable at the rate of 30% from the first dollar you earn. So it is better to start a company business as a sole trader because you’ll earn enough income to switch to a higher tax bracket.
- Harder to close down a company than an individual owned business or partnered business.
- Whether shares are transferred or not, a Capital Gains Tax (CGT) or stamp duty might be imposed on profit paid to investors.
- From a business standpoint, you do not have complete control over major financial decisions as you’ll require stockholders’ inputs, who are just as much business owners as you.
Is owning a company the right decision for me?
Starting up a company structure has many perks. However, it is not for everyone. The type of industry you work in matters a lot, so it needs to be as per your interests.
Asset Protection & Limited liability
When it comes to the medical industry, people prefer to start up a company business rather than an individual practice as the liabilities are much lower and limited in cases of negligent accidents. Medical facility owners have limited liabilities even if they get sued for malpractice.
Other companies that work in highly dangerous conditions also find company structure attractive because of its asset protection feature.
Your Turnover is well over $100, 000
Having a sole proprietorship or a partnered company is excellent. You have full control over its operations. But, it is possible only in a scenario where you have a small business with low income. As you cross the profit margin of $80,0000, you will be taxed 37%, or if you have profits above $180 000, you will be subjected to a 45% tax rate. Hence, you lose a considerable chunk of your income in taxes. So, in situations like these, it’s better to start a business as a company, as you pay only 30% tax. Smaller companies with profits less than 2 million dollars in a year pay only 28.5% in taxes.
What will you do as a sole trader of a company when you want to expand your business? Such as, opening a new branch or a new sector, etc.? You will probably end up taking loans.