SMALL BUSINESS
There will be several blogs from EDGE SME giving information on basic business structures. They will be a mix of simple definition of various structures and then comparisons of structures and how they might be relevant to you. The blogs are not reinventing the wheel, we are simply trying to explain the concepts and their application in an understandable way.
What is a Company?
‘A company is a legal entity formed by a person or several people, with the aim of engaging in a specific business activity. Companies can vary in size, structure, and purpose’ as the definition goes.
Companies are administrated by the Corporations Act and therefore the running of a company is more complex or onerous. A company gets incorporated and is a legal entity, separate from its owners (shareholders) that has the ability to enter into contracts, incur debts, and sue or be sued.
Before you register a company in Australia you should do some reading and the ASIC website is a good place to start, https://asic.gov.au/for-business/registering-a-company/before-you-register-a-company/.
You must check that the name you intend for your company is available,
A business name is separate to a company name. A company can trade in its own name. If a company intends to trade in anything other than its own name, then it must register the business name.
To do this you must check business name availability; https://asic.gov.au/for-business/registering-a-business-name/before-you-register-a-business-name/business-name-availability/.
EDGE SME can assist you with this, as can most accountants and lawyers.
A company is more expensive to set up than being a sole trader. As a sole trader, you are the legal entity and the sole worker in your business and any income or ‘drawings’ you make from your business relate to you as an individual. Companies have employees, so even if you are a director who works in your own company, you are an employee and need to pay yourself a wage unless you have a ‘company loan’ but this requires consideration because you get into the area of Division 7A and taxation. This is why you need a good tax accountant to get some planning and set up done properly.
Companies typically issue shares of stock to represent ownership, and shareholders receive dividends as a share of the company’s profits. The structure and regulations governing companies can vary based on the jurisdiction in which they are formed. Companies are subject to laws and regulations to ensure transparency, accountability, and fair business practices.
Companies are owned by their shareholders and controlled by their directors.
Although sole trader and partnership business structures are extremely common, the “company” structure is an extremely prevalent form of business structure.
There are various types of companies;
- Limited companies allow their shareholders to be liable only to the extent of the amount unpaid on their shares up to the par value of those shares. The most common form is a Proprietary Limited (Pty Ltd) company.
- Public companies also possess limited liability, but can have a many more shareholders and are often traded on listed exchanges.
- No-liability companies do not have a right to require shareholders to make any contribution towards the debts of the company, including any calls on shares. Instead, shares with unpaid calls result in forfeiture of shares. This form of company is sometimes seen in mining circles.
As mentioned previously, EDGE SME can assist you with initial discussions on a business structure and a tax accountant can assist you with your choice of structure in relation to tax planning.
Possible benefits in operating a company
- A small business that trades as a company can take advantage of the small business company tax rate if it qualifies, https://www.ato.gov.au/tax-rates-and-codes/company-tax-rate-changes. This blog does not cover income tax in any detail, suffice to say that there is a level of income and taxation as an individual or a sole trader, where your business will benefit from being in a company structure by paying less tax at the Australian Taxation’s Office’s small business income tax rate. Taxation is a big issue when considering what structure will best suit you and your business. The structure that may suit you now and for the next few years, may not be the one that will suit you after that.
- As opposed to being a sole trader, if you register a company, you can separate the assets of the company from you as an individual. As a sole trader or partnership, you are legally responsible for all aspects of your business, including debts and losses. Running a business this way can be risky, because it means that your personal assets are also on the line. By contrast, a company is a separate legal entity and it is an easy way to protect your personal assets from your business actions. Debts which attach to the company will not attach to you, which means that you can focus on building your business.
- As opposed to being a sole trader or being in a partnership, a company’s shareholders can be separate to the company’s management.
- Registering your company enhances the reputation and perception of your business. A company is its own entity. A company is also accountable to ASIC, as that is the body that administrates the Corporations Law and the company operates under an Australian Company Number (ACN).
- Becoming a registered company is also important for any future dealings with third parties, as many businesses will only hire or engage with registered companies. This means that your business contracts will have your company’s name on it, rather than your own.
- A company with shares can raise equity capital and this money can be paid into the company structure for business use and not be considered as taxable income. Raising money could be essential for the development and expansion of your business. It is also preferable for investors to invest in a registered company rather than a sole trader or partnership, mainly because they know that there is a formal structure in place to accept their investment.
The above is an introduction to the company structure and hopefully it has enlightened you on the fact that under the right circumstances, registering a company can be one of the best ways you can expand your business.