Choosing the Right Business Structure – a Closer Look at Companies


Choosing the Right Business Structure – a Closer Look at Companies

When you’re deciding if a company is the best business structure for you, take some time to look into the benefits and make sure they apply to your circumstances. A company is a legal entity which means it can exercise the same rights as a person. It can take out loans, own property, take legal action and be sued.

Companies are more complex than other business structures with protocols and obligations governed by the Corporations Act 2001 and monitored by the Australian Securities and Investment Commission (ASIC).

Company pros and cons.

In its simplest form, a private company has only one director and acts as a common alternative for the Sole Trader who may be able to take advantage of a lower tax rate. So, although companies may cost more to set up than other structures, in some cases those costs may be offset down the track.

Related article: Choosing the right business structure – A closer look at Sole Traders

As a separate legal entity, a company structure also goes some way to protecting its officeholders from personal bankruptcy. The assets of directors, for example, are quite separate from those of the company, which limits their personal financial risk. That means unexpected legal action against a company won’t necessarily expose the director’s family home unless they’ve acted in breach of their duties.

A public company can also raise capital by selling stock. A listing on the public stock exchange, however, comes with a great deal of responsibility and additional reporting costs.

Things to consider.

Whether you register your company with ASIC directly or use the services of a lawyer or accountant, there are a few issues you’ll need to be clear about:

  • The Corporations Act contains a set of rules for managing your company called ‘replaceable rules’. If you want to make your own rules, you’ll need a constitution. In the most basic setup where you are the sole director and shareholder, you won’t need to follow the replaceable rules or have a constitution.
  • If your company has more than one person at the helm, you’ll need to give some thought to the roles of each officeholder. You must have at least one director, but a company secretary is optional for private companies.
  • Decide on how shares will be distributed and if you’ll need different types. In a sole-director situation this is easy, but if you have a group of members, think about whether their shares will give them the right to vote or just receive dividends.

There’s no one-size-fits-all-company, and the range of options available are well beyond the reach of this article. But make yourself familiar with some of these terms and compile a list of questions to ask your solicitor and accountant. I asked fellow Smallville contributor and Virtual CFO, Amanda Fisher, what she had to add from an accountant’s point of view:

The benefit of a company is the flat rate of income tax which is lower than the higher levels of personal income tax.

Paying yourself a salary from your company means that you’ll be covered by the company’s workers’ compensation policy and you’ll be required to put a minimum amount into superannuation.

Once established however, companies are required to prepare financial statements which mean increased accounting fees, and there is an annual fee payable to ASIC to keep the company registered.

Once you’ve registered your company, you’ll receive an Australian Company Number (ACN) and a Corporate Key that enables you to update your company details and deal with ASIC online.

As a Director, your ongoing obligations will depend on the complexity of your company setup, so it’s important to know what they are from the outset and ensure you have systems in place to manage them.

Closing down.

If you decide to close your company, it isn’t as simple as ceasing to trade. In some cases (where assets are less than $1000) a simple deregistration may be allowed. If the company has debts, however, you’ll need to look at winding up your company. This involves selling assets and paying out debts which may require the appointment of a liquidator.

The ASIC website is a great source of reliable information and recommended reading for anyone who isn’t sure if a company is right for them. Ultimately, nothing beats personalised advice and a chat with your accountant will be money well spent.

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