Unlike a sole trader who essentially is the business, a company is a separate legal entity with directors who run the business and shareholders who own it. When business owners are interested in restructuring their business operations, the most commonly considered option is a company. This is usually because they believe they understand the way this structure works. Business owners are generally aware that a company owns the business assets and provides protection for their personal assets against business risk. However, there is far more to consider when picking a business structure than asset protection. A brief summary of the Benefits and issues of using a company is outlined below.
Pro’s and Con’s of Structuring Your Business as a Company
Advantages of a Company Structure
- Companies can be owned and run by one person;
- Shareholders are not responsible for company debts unless they sign a personal guarantee;
- Easier to attract capital because of limited liability;
- Companies can operate globally and own properties;
- Companies pay a flat 30% tax on every dollar of profit regardless of how much money is earned.
Disadvantages of a Company Structure
- Relatively expensive to establish and register;
- Compliance costs are generally higher and record keeping requirements are more strict;
- Shareholders may have difficulties in recovering their investment because of limitations on who can buy shares;
- Funds taken out of the company as a salary or wage attract the usual PAYG withholding and superannuation obligations;
- Companies that hold CGT assets do not receive the 12 month 50% CGT discount on disposal.
Business owners who are considering operating through a company structure must give due consideration to Division 7A. Division 7A essentially seeks to prevent directors and shareholders of private companies from taking the company’s profits for personal use. Individuals or entities that take ‘Drawings’ from a private company have until the lodgement date of the company’s income tax return to either repay the funds in full or enter into a suitable loan agreement with the company. Failure to do so will result in the amounts being treated as an unfranked dividend which will need to be included in the shareholder’s income tax return for the year. As you can imagine if the sum taken from the company is significant, this can result is a substantial tax bill.
Considering Restructuring into a Company?
Business owners looking to shift their business operations from a sole trader structure into a private company can experience a number of benefits. However, there are also a number of key differences and potential issues that must be understood and carefully managed. We strongly recommend anyone interested in setting up a company seek professional advice before doing so.
For more information about other structuring options please refer to the other articles in this series, or contact us if you’re looking for more personalised advice.