When you start a new business, one of the first things you must do is choose a business structure that will meet your exact needs.
In Australia, the four most common types of business structures are: sole trader, partnership, trust and company. Each structure has its own distinct advantages, and its own unique approach as to how you manage your tax, legal, and employment obligations. Ultimately, which business structure is right for you will come down to your unique circumstances, and your long term business goals.
Regardless of your business type or size, there are many good reasons to consider a company structure. How so? They are relatively easy to set up. They offer a number of tax benefits. And they help reduce your personal liability. Best of all? You can always change the business structure later on if you wish.
So, if you’re unsure what kind of business structure is right for you, read on to discover the benefits of a company structure.
- Reduced tax rate
Being a sole trader is the most simple and affordable way to run a business. However, sole traders (individuals) also pay a higher tax rate than companies.
How much more? Sole traders pay a minimum 19 per cent tax rate (19c for every dollar they earn) which gradually increases to 45 per cent tax rate if their income exceeds $180,000 per year. Companies, on the other hand, pay a total tax rate of 30 per cent or 27.5 per cent of their business is a base rate entity.
As a result, companies who fit under the same income bracket as sole traders can expect to pay 15 per cent less tax overall.[i]
- Distance yourself from liability
In a sole trader or partnership structure, each shareholder is fully responsible for all debts and liabilities incurred by the business. However, a company is considered its own separate legal entity.
For you, this means that if the business was to ever be sued, or run into sudden financial trouble, the company itself would bear the liability – not you or any other individual shareholder.
As a result, running a company does help free you of some (but not all) personal liability.
- Easy to transfer ownership
During the course of business, it’s only natural for the founding members to pass on the torch of leadership – either due to retirement, financial gain, illness, or death – so that new leaders can keep the legacy going.
Fortunately, when it comes to operating a company, transfer of ownership is relatively quick, easy, and affordable. In fact, you can even transfer ownership of the business through the ASIC (Australian Securities & Investments Commission) online portal.
Of course, you should always seek expert advice and support from a business advisor before you take this big step
- Employee benefits
Although you can hire employees under any type of business structure, there are benefits to doing so as a company.
Perhaps one of the most crucial is that any employee benefits you offer are tax-deductible. This applies to almost anything including pay bonuses, incentives (i.e. company car, phone), and shares.
By having the freedom to offer these benefits, can help you attract higher quality talent and be more competitive in your field.
- Super paid to employees can be claimed on tax
Under the SGC (Superannuation Guarantee Contribution), you the employer must contribute at least 9.5 per cent of all eligible workers ordinary time earnings into the super fund of their choice.[ii]
Fortunately, any super contributions made by the company can be claimed as a tax deduction. To find out who is considered an eligible worker for super purposes, refer to the ATO website.
- Be eligible for government grants and incentives
Each state and territory government has their own series of grants, incentives, and funding programs to help businesses grow and succeed.
You have to meet strict criteria in order to be eligible for these types of grants. While the criteria are different for each program, in most cases, your business must be registered as a company.
By gaining exclusive access to government-funded grants and incentives, can help your business gain the necessary funding and resources it needs to grow much faster.
- Easy to raise capital
Whether you operate as a private (limited liability) or public business structure, there are many ways you can raise capital; be it through financial gain, assets, security, and more.
Keep in mind, both private and public companies must adhere to different capital raising guidelines. For instance, private companies can only sell shares to existing shareholders and employees (but not the general public), while public companies can engage with the general public to raise funds.
For this reason, consult a business advisor to find out what you can and cannot do to raise funds.
- Attract higher quality talent
Although unfair, through the eyes of a potential candidate, they will immediately be drawn to a company rather than a sole trader enterprise. Why? Because there’s an immediate assumption that the company is more ‘polished’ or ‘professional.’
For this reason, as a company, you are more likely to be perceived as an attractive place to work, which in turn will help you attract and retain more valuable talent – especially if you throw in a few employee bonuses.
- Easy to plan accordingly
Running a company often means having multiple shareholders make key decisions. For this reason, it’s a good idea to have a shareholder agreement in place to ensure everyone is on the same page.
Some key terms to have in the shareholders’ agreement include:
- Percentage of ownership
- Dispute resolution process
- How and who will make certain decisions
- Selling shares
- General meetings
- Confidential agreements
- Exit strategy
By having a shareholders agreement, will make it easier to manage the company and help resolve future conflicts.
- Easy to set up
Registering a company is easier than you think. Sure, there’s a bit more paperwork and reporting requirements. But overall, the actual process of registering and setting up a company is surprisingly simple.
All you have to do is satisfy the following criteria:
- Register the company name with ASIC
- Register the company as a legal entity
- Apply for an ABN
- Nominate your shareholders
- Establish the agreement terms among shareholders
- Register for the right taxes (i.e. GST)
- Establish the right shareholder structure
By far the easiest way to do this is to enlist the help of a business accountant or advisor. They can tell you exactly what you need to do to set up your business, guide you through each step of the process, and make sure everything is set up just the way you want so that you can start operating straight away.
[i] https://www.ato.gov.au/Rates/Changes-to-company-tax-rates/?page=1#Base_rate_entity_company_tax_rate
