Want to know if a company business structure is right for YOU?
Do you feel like it’s time to level up?
In this article, we explore the company business structure and what’s involved.
Before you make the jump, take a look at this first!
Sole Trader or Company?
Most businesses usually start out as a sole trader, but as your business grows and your risks and assets increase, you might need to consider a stronger asset protection strategy.
A company structure is suitable for businesses that want to separate their personal assets from that of the business.
A company is a separate legal entity, which means that it can own property, incur debts, sue and be sued. This adds an extra level of protection between the activities and risks of the business and you, personally.
You should be aware that companies in Australia:
- have their own ABN
- will be given an Australian Company Number (ACN)
- must register for their own tax file number and submit tax returns
- must register for GST if turnover is more than $75K
- must pay super for any eligible workers, including directors
Taxation of Companies
Companies aren’t just used as part of a strong risk minimisation strategy, they can be used to reduce tax, too. Companies usually pay tax at a flat rate of 26%, which is considerably lower that the amount of tax payable as a sole trader at the personal rate. There’s also the advantage of the company imputation system which sees dividends paid to shareholders avoid paying tax twice.
Directors’ Duties
Even though a company is a separate legal entity, the ‘corporate veil’ can be lifted if directors act inappropriately.
Lifting the veil means that directors can be personally liable for the debts of the company. This ‘lifting’ occurs in limited circumstances, namely where directors’ duties have been breached. Directors have a special role and owe important duties to the company. This is different than as a sole trader, and breaching these duties can carry significant consequences.
If you’re thinking of becoming a director of a company, you’ll want to read up on directors’ duties and the consequences of breaching these duties before you get started. A common example of breaching director’s duties includes allowing the company to trade while insolvent.
Replaceable Rules
The replaceable rules and the corporations act represent the default rules that companies must follow if they elect not to have a Constitution and/or Shareholder’s Agreement.
These are basic rules that govern the management of a company. They cover things like voting, shares, director’s remuneration, appointing and removing directors and more.
You’ve got three options when deciding how to manage your company:
- Adopt a constitution
- Adopt a constitution and some of the replaceable rules
- Use the replaceable rules without a constitution
Of these options, adopting a constitution provides you with the greater amount of control over your company, which should be an important consideration given the value of your business.
Choosing the replaceable rules may be suitable if you’re a sole director, but once you bring on more people, you’ll want clear procedures for managing the company.
This is best achieved with a Constitution and/or Shareholder’s Agreement because you’ll be able to decide the procedures for things like selling shares, dispute resolution and how decisions are made. Failing to clearly outline these steps can lead to stalemates, and in worse case scenarios, can force the winding up of a company.
Key Takeaways
Registering a company can be an excellent risk minimisation strategy for your business.
A company can help to protect your personal assets, reduce your tax and limit your liability as a business-owner.
However, you should also be aware of the additional responsibilities and compliance costs associated with runnng a company.
Next Steps
Transferring from a sole trader to a company is a savvy move for any business owner who’s outgrowing (or already outgrown) their existing structure.
If you are interested in registering a company, contact Her Lawyer today to get the ball rolling.
