One operating option for a business is to operate as a company. This STRUCTURE provide access to a number of tax planning strategies and limited liability status
An incorporated company is a distinct legal entity that is able to enter into contracts in its own name. The fact that the company is a separate legal entity from its owners is very important as it means that all the company's liabilities are the responsibility of the company – not that of the directors and shareholders!
The only exception is if you, as director of the company, offer a bank or other creditor a personal guarantee to repay the company's debt. In that instance you then become personally liable to repay the debt if the company is not able to. Payment of Super and Employees' tax is necessary to prevent director's penalties.
So what are the ADVANTAGES and DISADVANTAGES of incorporating your business?
- Limited liability – as explained above, the company is a separate legal entity and this can protect your personal assets from business creditors if for any reason the company is unable to clear all of its debts and has to cease operating. Operating as such is especially useful, if there are significant risks associated with your business activity.
- Due to the Limited Liability discussed above, companies look like a more secure prospect to investors.
- Status – the business artificially looks bigger and more professional.
- Succession of shareholders is more straightforward.
- Tax efficiency – operating as an incorporated company can be more tax-efficient, depending on the business turnover. The larger the income, the more likely a company structure will save tax.
- More cost – the professional costs for setting up the company and for preparing company accounts and tax returns can be higher than those you would expect to pay if you were self-employed. There are then additional costs involved with various ATO requirements.
- Companies must file their accounts and various other documents on public record with ATO, so companies have less privacy than unincorporated businesses.
- As a general principle, you tend not to have ‘mixed-purpose’ expenditure by a company; it either is for business purposes; or it’s not – and recognising mixed-use assets or expenditure can trigger tax charges on the relevant employees/ directors.
- Any losses generated by a company, belong to the company, therefore, they cannot be utilised by the directors or shareholders.
- Audit requirement – If your company exceeds certain limits, or is in a particular operating sector, an audit may be required thus incurring further costs. We can advise on this, but most small companies will be exempt from annual audits.
Needless to say, choosing the right business entity is not always an easy decision.
We are happy to discuss your individual requirements and undertake a proper risk assessment thus enabling you to decide on the best way forward for your business. Whether you proceed as a proprietary limited company or as an unincorporated business, our assessment will indicate the most beneficial tax arrangements available to you and help you to make sensible choices about how you can minimise your commercial risks.