STRUCTURES – THE COMPANY
What is a company? A company is a legal entity distinct from those who may own or run it. It has it’s affairs managed by directors (aka officeholders) and is owned by shareholders (aka members). A shareholder’s liability is generally limited to any amounts that may be unpaid for their shares. Without considering misconduct, a director’s liability will generally be limited to any unpaid employee entitlements (e.g. superannuation and PAYG withholding) there may be.
Set up procedure:
- Incorporate a new company (we can do this and most of the below steps for you)
- Register for ABN and TFN with the Australian Business Register (ABR)
- Register for GST and PAYGW with the ABR if applicable
- Set up a company bank account
- Set up a bookkeeping system (we recommend Xero) and put in place a bookkeeper (or DIY if you’re willing and able)
- Appoint a suitably qualified and experienced accountant to handle your tax and ASIC compliance as well as provide business advice
- Appoint a suitably qualified lawyer
Advantages of the company structure include:
- Limited liability
- Corporate tax rate lower than the top individual marginal rate (30% vs 47%)
- Flexible in distribution of income, with some restrictions in case of Personal Services Income (PSI) entities
- Tax paid by company is credited to shareholders when profits are paid out via dividends
- Superannuation contributions deductible to the company
Disadvantages of the company structure include:
- Cost of establishing and maintaining is higher than that of a sole trader or partnership
- Director’s potential liability in case of negligence, insolvent trading, unpaid employee entitlements, or more
- Compulsory Workers Compensation and superannuation contributions on wages drawn
- Losses cannot be distributed to shareholders
- More compliance issues — accounting standards, ATO, and ASIC
- No access to the CGT discount
This is a popular structure and a natural progression for people running a business where there are third party contractual arrangements including employees. It is also the perfect structure for taking on investors and giving key staff equity.The structure provides asset protection and allows for effective tax planning, but has strong, and sometimes complex, compliance issues.
One key issue for people in creative (or any service-based) industries to consider is the interaction of the Personal Services Income provisions with Part IVA (which is the general anti-avoidance provision). What does this mean for me? If you are planning on setting up a company to earn income from the provision of your personal services and then use the company to shelter the tax you pay at the corporate rate rather than the top marginal personal tax rate, or use the company to ‘income split’ with your spouse, then you may fall foul of the law and end up having the income all taxed in your own name anyway.
The above is a general guide only and pertains to proprietary limited companies only. As with any structuring it is important you speak with your lawyer and your accountant before going ahead as there are legal and tax complications that will be specific to your situation that should be addressed.
We routinely help clients establish business structures, including companies, for new ventures and for restructuring existing ventures. If this is something you’d like to discuss further, please get in touch today, we’d love to help.