Bulletin Series: Structuring For Small Business Part 4 – Company

June 27, 2018

Companies and small business
A company is a separate legal entity, having at least one director and shareholder. If you choose a corporate structure for your small business, the business will be controlled by the directors of the company and owned by the shareholders of the company.

The income earned by the business belongs to the company, which can be used to re-invest back into the business or distributed to the shareholders by paying dividends.

Some important aspects for you to consider if you are thinking about setting up a corporate structure for your small business are:

Control
The directors control and make the day to day decisions for the business.

It is therefore relatively easy to change the control of the company, without incurring significant costs, tax or stamp duty, by changing the directors.

The shareholders have the ultimate decision as to who will be directors of the company.

Changing the underlying ownership of the company, by introducing new shareholders, requires the issuing or transferring of shares.  You should obtain advice before issuing or transferring shares as there may be tax or stamp duty consequences.

Generally, provided the company owns no land, shares can be issued or transferred without stamp duty, however the tax implications must still be considered.

On the death or incapacity of a director or shareholder, provided that person has an effective will and enduring power of attorney, there is generally less disruption to the business, compared to that of a sole trader or partnership.

Taxation
Companies are taxed at the corporate tax rate (which is much lower than the top marginal rate for individuals). This means that the business will have higher surplus income to reinvest back in to the business, allowing the business to grow at a more rapid rate.

Income is distributed to shareholders by dividends in proportion to the number of shares held by each shareholder.

The personal tax position of the shareholder must be considered when declaring a dividend as a shareholder may either be required to pay more tax or may be entitled to a refund for the tax paid by the company.

The shareholding of a company may be structured to introduce greater flexibility into the distribution of profits amongst the principals of the business and their families.

Costs
There are costs involved to set up a company, these costs include both ASIC fees and legal or accountant fees. There are also ongoing annual reporting costs for a company.

However, it is important for you to weigh up the initial start-up costs in comparison with benefits the corporate structure offers. The start-up and ongoing costs might be insignificant in the bigger picture when weighing up the taxation and asset protection advantages.

Risk
The risks associated with the carrying on of a business (for example incurring debts) lies with the company. If the company goes into debt, the shareholder’s liability is limited to the amount of share capital they have contributed. A shareholder’s personal assets are completely separate from the business and therefore not at risk.

The directors of a company are responsible for ensuring the company complies with its legal obligations, and can be held personally liable if they fail in that responsibility. To find out more about director’s duties, have a look at our 6-part publication on director’s duties.

To find out more about corporate business structures, please contact our commercial team on 07 4671 6000.

In our next bulletin we will discuss the Trust structure for small business.

To review Part 1 of this bulletin series, click here – Overview of Different Structure Types

To review Part 2 of this bulletin series, click here – Sole Trader

To review Part 3 of this bulletin series, click here – Partnership