Choosing the right business structure part 4- Company

27. November 2024

When setting up a business, it’s important to consider the structure of the business right from the start, as it will have ownership, tax and legal obligations. Your chosen structure must also be able to support your long-term business goals.

There are 4 common business structures in Australia, which include:

  • Sole Trader
  • Partnership
  • Trust
  • Company

This article will cover off the company structure, as well as the main benefits, disadvantages and tax implications. If you’re wondering which is the right structure for your particular circumstances, talk to one of our registered tax agents. Also remember to check out the other articles in this series! 

What is a Company?

A company is a separate legal entity with its own tax and superannuation obligations. It is run by the company directors and owned by its shareholders.

The assets, liabilities, income and expenses incurred by of the company are accrued to the company, not an individual. There may be tax consequences if you are using your company’s money and assets for private purposes. The business is also regulated by the Corporations Act and must abide by all the standards the act stipulates. A company can be operated either privately or publicly.

Companies fall into the following categories:

  • Companies limited by shared – This type of structure limits the liability of shareholders to the value of their shares. This form of company can either be public or private
  • Companies limited by guarantee – The liability of members is limited to the amounts the members contribute to the company if the company wounds up. This form is often used by non-trading or non-profit organisations like areligious organisation, charity or sporting club

ASIC regulates and governs all companies in Australia, using the Corporations Act 2001. ASIC also maintains a database of all companies in Australia.

Advantages of a Company

  • Shareholders generally only lose the value of their shares, and aren’t liable for the company’s debts
  • A company can trade anywhere in Australia
  • A company is a much better structure if you anticipate high growth for your business
  • All legal arrangements are made in the company’s name, not an individual director in the business
  • Most flexible form of structure in relation to continuity of trade in the event of illness, disability or death of key owners
  • Company shares may be transferred
  • Company tax rates are more favourable than the highest marginal tax rate for individuals

Disadvantages of a Company

  • This is the most regulated of all the business structures, so there is significant cost, administration and expertise required to set one up, and run it
  • Companies must comply with all legislation as outlined in the Corporations Act 2001 and regulated by ASIC. This adds complexity and additional costs
  • Under the Act, directors have a set of duties, which if breached, can mean they are personally liable for the company debt. Duties include acting in good faith, not trade while insolvent
  • Supplier or lenders are often reluctant to lend money or enter contracts with proprietary limited companies unless personal guarantees are offered
  • There are tax disadvantages to this company structure. Corporation tax rates will apply and personal tax-free thresholds are not available. No CGT small business concession or 50% CGT discount for sale of assets held by a company is available to this business structure. Shareholders pay tax on their dividends at their marginal rate and there’s not much scope for tax planning
  • Any income derived by a company where it’s rental income, capital growth or interest is taxable, which is different to how a trust is structured
  • There are greater and more complex tax reporting requirements than sole traders and partnerships
  • There is a lack of confidentiality as a company’s financial affairs are public
  • If a company holds all the business’ assets and IP, they are at risk if someone sues the company. There are ways to mitigate this risk, including the use of a holding company or an operating company.

Key Tax Obligations

  • A company is responsible for its own tax and superannuation obligations
  • Must have its own TFN
  • Is entitled to an ABN if registered under the Corporations Act 2001
  • A company must register for GST if it turnover more than $75,000 annually, provides taxi, limousine or ride-sourcing services or wants to claim fuel tax credits.
  • Might be required to lodge BAS statements
  • Must lodge an annual company tax return
  • Tax is usually paid via instalments via PAYG system
  • Tax is paid at the applicable company tax rate
  • Must issue distribution statements to any shareholders it pays
  • Must pay superannuation guarantee for any staff

There are many reasons why a company may be the right structure for your business, and we’ve covered off the main points here. Don’t forget to check out parts 1-3 of this series, where we cover off structuring as a Sole Trader, Partnership or Trust. Don’t hesitate to get in touch if you need specialised advice for your situation.

Liability limited by a scheme approved under Professional Standards Legislation.