For business owners whose main goal is to scale, setting up a new business as a company is the ideal choice of structure.
A company business structure provides owners with:
- The flexibility to expand
- The resources to bring on new partners
- The ability to take advantage of a capped taxation rate
- The comfort of a reduced level of personal liability
While setting up a company is an excellent way to grow wealth, it also has its risks. This article dives into the pros and cons of structuring your business as a company, providing you with the information you need to determine if it's is the right choice for your business.
Liston Newton Advisory is here to help business owners safely navigate the ups and downs that come with setting up a new company.
The pros and cons of a company business structure
There are several pros and cons to structuring your business as a company. These can be found in the table below.
[td]Enables flexible business expansion[/td]
[td]High set-up and ongoing costs when compared to other structures[/td]
[td]Tax rate capped at 27.5%[/td]
[td]Loss of full business control[/td]
[td]Well-defined governance agreements[/td]
[td]Requires a higher level of business understanding and responsibility[/td]
[td]Limited liability and increased personal asset protection[/td]
[td]Limited tax concessions[/td]
[td]A range of Government grants and incentives available[/td]
Advantages of a company business structure
1. Built for business expansion
The company business structure enables easy additions of new shareholders, investors, and co-owners. Additional shares can be issues to new shareholders easily. A company structure is also flexible in how it moves, and ownership can be transferred, and the company sold, with minimal hassle.
When it comes to wealth generation, companies are subject to the flat company tax rate, and their tax is capped at a rate 27.5%. This means that that sustained growth isn’t hampered by onerous tax rates, and allows the business to be more tax-effective.
2. Well-defined governance agreements
Under a company business structure, a written shareholder agreement clearly outlines all governance rules, exit protocols, and dispute processes. This provides a strong support structure to make business decisions with confidence, and ensures all shareholders are on the same page.
3. Limited liability and reduced personal risk
A company business structure is separate from your personal assets, and is considered an independent legal entity. It’s run by company directors, and owned by shareholders. This works to limit your personal liability, as all liability is borne by the company entity.
In the event of financial difficulty or legal action, shareholders are only liable for debts that the company has incurred to the sum of the amount that’s unpaid on their shares. The company itself takes on the rest of this liability. This makes a company’s liability limitations an attractive option for shareholders and investors looking for a low-risk investment.
4. Unlimited lifespan
A company can effectively continue on indefinitely, making money, until it is dissolved. This makes it the ideal structure for long-term wealth generation.
5. Government support
One of the positives associated with owning a company is the level of government support available. This can take the form of schemes and grants designed to see companies succeed.
For example, the Government’s R&D incentive enables companies to claim a refundable tax offset of up to 43.5%. The Innovation Incentive Concession was recently introduced as well, which offers tax incentives for early stage innovation companies. This provides a tax offset that’s equal to the amount paid for the innovation investment, and is an attractive incentive for investors.
Risks of a company business structure
1. Higher fees
A company business structure involves more complex management than other business structures, so there are higher set-up and administration costs, and ongoing annual fees.
- Company business owners can expect to pay $495 to register for an Australian Company Name.
- ASIC charge an Annual Review Fee, generally around $267 for a proprietary company, or $1,240 for a public company. These also incur late payment fees.
- Given the complexity of running a company, there are also associated fees for services like annual tax accounting, which can range anywhere from $1,000 upwards.
For businesses not generating as much income as hoped, these fees can hit hard.
2. Reduced control of the business
Operating under a company business structure can mean less personal control of the business if other directors and shareholders are involved, as all company shareholders are required to agree on business decisions. A company owner has to take into account competing shareholder interests, and the potential for further loss of control to future shareholders.
So if full personal control is something you want from a business, then a company business structure may not be for you.
3. Higher level of business understanding required
Operating a company requires more in-depth reporting and governance responsibilities than other business structures.
As they’re regulated by ASIC, both the company and its Directors receive additional reporting obligations. Regular financial reporting is required, and the company’s annual tax return involves stricter organisation than other structures.
When setting up a company, there is also the need to undertake activities associated with organising and setting up governance structures, company officeholder positions, the structure of company shares, and the company’s legal obligations.
4. Limited tax concessions
While companies can apply for Government grants and schemes, a company isn’t eligible to receive capital gains concessions, so does not receive the 50% CGT discount upon sale.
Who should consider a company business structure
Setting up a business under a company structure is ideal for a number of situations.
- It's the best choice for businesses aimed at high growth.
- For businesses with multiple employees, a company business structure ensures their PAYG needs are taken care of.
- Company structure enables future expansion for businesses who plan on scaling to multiple locations, or franchise options.
- Company structure offers management flexibility for businesses with multiple owners.
- It also offers the potential for more owners and shareholders to come on board in the future.
When a company business structure is not the best option
While it gears businesses for growth, a company business structure isn’t always the best decision.
It’s not recommended for businesses who don’t foresee much growth. This doesn’t mean they’re not profitable—but a company structure does not include the tax-free threshold, which means the business owner will be taxed the flat 27.5% amount throughout their entire earning journey.
It's not recommended for sole practitioners who are their own business. For business individuals where they embody their business, like writers, teachers, craftspeople, or artists, it doesn’t make much financial sense to set up a company structure.
It may not be suitable for a family business. A family trust structure may be more appropriate. This enables the income generated by the business to be divided among the family in a tax-effective manner, and ensures the business is kept firmly within your family unit.
The final word on setting up a company
A company structure is the ideal option for businesses looking to achieve high growth for the long term, build a scalable business, and take advantage of reduced personal liability.
When setting up a business under a company structure, it’s important to seek the right advice, to ensure it really is the best option for your situation.