Choosing the right business structure for your business is critical as your business structure will determine your tax rates, liability, asset protection, legal obligations and costs.
What is a Company?
A company is a legal entity that is separate from its owners and operators. A company has shareholders who own the company as well as directors who run the company. Unlike other business structures, a company is a distinct person by law and as such is liable to debts and other obligations, taking the liability off company shareholders.
Advantages of a Company Structure
Limited Liability
A company, as a separate legal entity, is liable for its own debts. The debts of the company are not the debts of the shareholders. There are exceptions to limited liability such as when shareholders have provided personal guarantees to borrow money or if a company director breaches their directors duties.
Reduced Tax Rate
Companies generally pay lower taxes than other business structures. Sole traders, for example, pay tax on their business out of their individual income. A company has access to a reduced company tax rate, which is generally lower than the individual tax rate.
Disadvantages of a Company Structure
Costs
A company structure is subject to higher set up costs, such as registering the company, as well as ongoing costs, such as accounting fees.
Complexity
A company has various legal obligations. There are specific director’s duties for company directors which must be complied with. A company must also comply with tax and super regulations enforced by the ATO and comply with ASIC’s information requirements, such as keeping financial records.
Other Business Structures
Apart from the company structure, there are three other commonly used business structures including trust, sole trader and partnership structures.
Trust
A trust involves an individual or company who owns the business assets and carries on business for the benefit of other people, the beneficiaries.
A trust is not a separate legal entity. If the trustee is an individual, the trustee is legally liable for the debts of the trust. If the trustee is a corporate trustee, liability is reduced.
Each beneficiary pays income tax on what they receive. If the trust has employees, it is liable to make PAYG instalments as well as superannuation contributions for its employees.
Sole Trader
A sole trader is an individual who owns and runs a business.
All of the assets and liabilities of the business belong to the sole trader, meaning they are liable in all aspects of the business.
Sole traders pay tax at the individual income rate and report on their business income in their individual tax return. The more income that the business makes, the higher the tax liability is. Sole traders can not access flat tax rates such as those accessible to companies.
Partnership
A partnership is an association of two or more individuals for the purpose of carrying on a business venture or activity with a view to profit.
Like a sole trader structure, a partnership is not a separate legal entity. All assets of the partnership are owned jointly by the partners, and partners are jointly responsible for business debts.
A partnership does not pay tax on its income, however the income is spread equally across all partners from which tax will be paid on their share of the business.
Key Takeaways
Determining the right structure for your business is critical as it can have both legal and financial consequences. A company structure is beneficial if you seek to limit personal liability and access lower tax rates.
Should you require further legal advice please contact OpenLegal by filling in the form on this page or calling 1300 337 997.
Alana is a legal intern at OpenLegal whilst studying a Bachelor of Laws at Macquarie University. Alana’s key areas of interest include commercial law and property law.
Phil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.
