Will a Company Business Structure Work for You?
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 or a 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?
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?
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.
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.
However, if you have a company business, you can always sell your shares to collect the capital funds, at a 30% tax rate. It will be a sensible approach rather than losing the investment money you took as a sole trader to the ATO because of the higher tax rate.
A majority of accountants will recommend the same when opening up a new business venture in which you see the potential for growth in the future.
Operating as a company right from the start will depend upon several factors, such as whether you see your business growing gradually and require long term capital investment.
What if I Operate Business a Sole Director?
If you have an individually owned business, then you can trade as the sole owner/director with one shareholder. When it comes to company business, in a situation where you want to become the director, you can sell shares to your family members, making it easier to become the director for you.
A limited versus unlimited proprietary company
With a Limited Propriety Company (name ending with Propriety Limited), the shareowners are only accountable for their shares even in events of bankruptcy and debts. Whereas, in an Unlimited Propriety Company (name ending with Propriety), the shareholders are responsible for the unlimited liabilities that the company has. This plan is the path that businesses with less risk prefer.
How to set up the company?
Registration of the company under ASIC.
You need to get a Tax File Number to record your yearly tax dues.
The company also has to report the amount of profit and the tax they owe on the income they get as a state return document.
You also have to register for the free of cost Australian Business Number.
To withhold a name or brand for the company, you need to pay $45, which we advise you not to pay unless you want to open an outlet in a hurry.
The fee for Limited Private Propriety is exactly $463. To certify a name for 12 months is $34, and if you want for 36 months, it is $79. It is the same for an individually owned business and a company.
What other demands do you need to fulfil?
Due to being registered under ASIC, you need to comply with the Corporations Act 2001.
There should be a pension fund assigned to the workers of the company.
The company has a different bank account separate from the personal bank account. This money is the company’s property.
You will be subjected to pay the GST tax after your annual income from the company succeeds $75, 000.
You will have to pay ATO money in installments using the Pay As You Go method.
If you earn limited liability income based on your experience and knowledge set, such as for offering engineering consultancy, your revenue may be reviewed for personal tax purposes as an independent income.
If you decide to sell or transfer shares in the company, you have to report it to the ASIC.
In the income-splitting plan, where the families are the major shareholders, you have to create retirement plans. The tax is still applicable to retirement plans.
The company Tax rate does not apply all the time!
Even if you are the sole owner of the company and do all the work, the ATO will not take only the 30% tax; they will also receive tax on your income because that is something you earned yourself. For example, if you have your clinic as a medical professional and are the sole owner, the company will give you a tax-deductible fixed income. Furthermore, you will also have to add to your super fund from your income you get after paying the taxes. Due to medicine being a high-risk industry, medical professionals will go for the asset protection scheme as the liabilities can be extreme.