A Company is a separate legal entity and can incur debt, sue and be sued. The Shareholders of a company are its owners and can limit their personal liability and are generally not responsible for the company debts.
A Company must have at least one Director. A Director is responsible for managing the company business activities and must comply with their legal obligations under the Corporations Act. To become a company, an entity must be incorporated under the Corporations Act and register with ASIC.
For small business owners, the added compliance and director responsibilities when trading as a company means there needs to be a strong reason for a company to be chosen as your business structure over a Sole trader or Partnership.
Any profits the company makes are the companies. This is great where the business is reinvesting the profits into plant and equipment or maybe the debtors of the business are increasing. However when the Directors and Shareholders use these funds for personal use, either acquiring personal assets, paying off personal debt or our least favourite, on personal expenses, this can create taxation issues whereby additional wages or Dividends are required to be paid to the Shareholders/Directors to move the funds from the company to the individuals who have used the funds.
Another reason a company may be used for a small business for commercial reasons. By this we mean, a company gives a business more status when dealing with other businesses or the government. It may be that for a government contract that the small business needs to be trading as a company.
Some other factors to consider when considering a company are:
- Losses carry forward indefinitely, while ownership is the same.
- Losses can’t be distributed to shareholders
- Easy to sell and pass on ownership
- Once tax is paid on profits and cash flow allows, the company can declare and pay franked dividends to shareholders, in some cases leading to positive tax outcomes for shareholders. (election)
- Significant set up costs and additional annual reporting requirements are the downside.
Selecting a business structure is one of the key decisions to make when starting a business. The structure that you choose will depend on the size and type of business, your personal circumstances and how much you plan to grow the business in the future.
Find out about the 4 main business structures below.
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