When starting or taking over a business, choosing the right structure can be a complicated and confusing process. There’s a lot to consider, as each structure has its own pros and cons.
To make it easy for you, we’ve created this guide to the company business structure. It’s designed to give you all the information you need to make an informed decision on whether this is the best fit to set you up for long-term success.
[feature_link]Read more: 5 common business structure mistakes to avoid when setting up your business.[/feature_link]
A quick guide to business structures
When starting a new business, it’s important to choose a business structure that enables you to reach your unique goals. The most common business structures are:
- Sole trader. Perfect for individuals just starting their own business.
- Partnership. Suitable for two or more individuals looking to start a business together.
- Company. The most common structure for businesses with multiple employees looking to achieve high growth.
- Family Trust. Suits business owners who want to protect their family assets and distribute their income to the family in a tax-effective manner.
- Unit Trust. Started by multiple business owners who aren’t family members, who want to start a trust together.
When to choose a company structure
A company business structure is the best choice if you’re aiming for high growth, and plan on scaling your business over time.
It’s ideal for businesses with multiple owners and/or employees, and it allows you to bring additional business owners or investors on board at any time.
The pros and cons of a company structure
[td]Good flexibility to allow for future growth[/td]
[td]Higher set-up cost than other business structures[/td]
[td]Can support multiple employees[/td]
[td]Higher ongoing costs than other business structures[/td]
[td]Government grants and incentives available[/td]
[td]More governance requirements[/td]
[td]Separate legal entity to your personal assets, which limits your liability[/td]
[td]Rigid regulation through ASIC and ATO[/td]
[td]A clear agreement to clarify shareholder governance and exit protocols[/td]
[td]Limited tax concessions[/td]
[td]Capped tax rate for companies[/td]
Benefits of a company business structure
A company business structure is an independent legal entity run by directors and owned by shareholders. This means that as a business owner your personal liability is limited, which protects you in the event of financial difficulty or legal action.
This also limits the liability to the business itself, while protecting your personal assets (unless you sign a director’s guarantee or personal guarantee for loans and leases). This limited liability is an attractive incentive for investors, too.
A company business structure is set up so that it’s easy to add new co-owners, shareholders, and investors. Additional shares are able to be issued to new shareholders, and existing shareholders can also sell shares.
Incentives when starting out
There are also various opportunities for tax concessions and grants when running a business as a company. Schemes like the Government’s Research & Development tax incentive enable companies with an aggregated turnover of less than $20 million per annum to claim a refundable tax offset of up to 43.5%.
An Innovation Incentive Concession has also been introduced in 2019, which offers tax concessions for investment in early stage innovation companies. This incentive provides a tax offset equal to 20% of the amount paid for the investment, as well as modified capital gains tax treatment, where capital gains on qualifying shares may be disregarded. As with the R&D tax incentive, this concession is only on accessible for businesses set up in a company structure.
Disadvantages of a company business structure
Being more complex than a sole trader or partnership business structure, set-up and administration costs are higher with this type of business model. There are also higher ongoing annual fees that require payment.
Rigid reporting requirements
While they allow for growth, company structures are less flexible than a sole trader or trust structure. Companies are regulated by the Australian Securities & Investments Commission (ASIC) and require strict compliance. This leads to additional duties and requirements for both the company and its directors. Tax reporting requirements are also more onerous.
No capital gains concession
Capital gains concessions, which allow a 50% discount for assets held for more than 12 months or more, do not apply to Companies.
Your checklist for setting up a company
Here’s a quick run-down of some things to consider, and what to ask yourself, when setting up a company.
- When choosing a company name it must be unique, so check its availability with ASIC first. Check to see if you need to register the business name as well.
- Determining your Director is a significant obligation, so it’s important that you understand all the responsibilities that come with it. Is at least one Director an Australian resident?
- Choose your company officeholders. This includes your Company Secretary and Public Officer.
- What address will your business be registered to?
- Do you need to register trademarks?
- Where will the shares be held? Are they being held in your name, your spouse’s, or in a trust or another company?
- Determine the type of business insurance you need.
- Register your ABN, TFN, and register for GST and PAYG requirements.
- Determine whether you’ll pay GST monthly, quarterly, or annually.
- Choose the right accounting software for your type of business.
Tax requirements for companies
Companies are subject to tax at the company tax rate, which means that profits are taxed at either 27.5% or 30%, depending on the purpose of your business. Once paid, a Company can then declare dividends to its shareholders, or the profits can be retained to reinvest into future growth.
Companies usually pay income tax by instalments through the PAYG instalments system, and they’re also required to lodge an annual company tax return.
How can money be withdrawn from a company?
The only way a business owner can take money out of a company is to pay themselves a salary, take a loan from the business, or declare dividends from the profits.
A business owner will commonly draw a salary during the year and then receive additional dividends for any profits after their salary has been deducted.
Setting up company shareholdings
To best protect your assets it’s often a good idea to avoid holding shares personally. Instead, you can separate ownership by setting up a family trust that will own those shares. This protects your assets more effectively in the event of financial difficulty or legal action, while also offering the flexibility to distribute income for maximum tax-saving efficiency.
When to hold investments in a company structure
A company structure can be a good option for holding your personal investments, but there are both positives and negatives to this approach.
On the plus side, a company business structure can continue indefinitely, making it an ideal vehicle for long-term wealth generation. If long-term wealth generation is a priority, a company structure may be a better option than a family trust, which must be would up after 80 years.
However, the flat rate of tax is 30% – and companies are also ineligible for the 50% CGT discount available to individuals and family trusts.
Nevertheless, for an individual on the top marginal tax rate of 49%, it’s an option worth considering. This results in a tax outcome that’s very similar when comparing a family trust with a company structure – even without accessing the CGT discount.