Do I need to start a company?
Updated: Jan 30
Recently, as I continue my own business planning and start talking to more business owners about what kind of support they are actually looking for from their accountant, I have been surprised at just how many people have been sitting on the thought of "Is it time for me to create a company?"
Of course, some other common themes have emerged too, such as "How do I know when my business can hire staff?", "How do I pay myself a wage and superannuation?", and "What do I even need to do to start a business at all?" which I also feel the need to write about (watch this space!) but for now let's focus on the business structuring decision: Do you need a company?
What are my business structuring options?
First of all, a company is just one of many business structuring options available. The four most common types of business structures in Australia are Sole Trader, Partnership, Company, and Discretionary (family) Trust. Each structure comes with its own advantages and disadvantages and it is important for business owners to be across these and make an informed decision on which structure is best suited to individual circumstances. The table below provides a quick snapshot of all the options.
A company may be worth considering in a number of common situations: Your business may be undergoing a period of significant growth; you may be wanting to secure large contracts with Government or attract investment; you may be wanting to protect your personal assets from business activities; or you may wish to access the reduced company tax rates for small businesses in Australia (27.5% tax rate for 2019-20, reducing to 25% by 2021-22 under the current Liberal Government).
What is a Company and why would I need one?
A Company is a separate legal entity, regulated by The Corporations Act 2001. Being a separate legal entity means that the company holds its own property, is liable for the debts it incurs, and can sue or be sued in its own name (sparing the owners!)
Operating through company can make it easier to access and raise capital, it has the potential to make your business more credible and will allow you take advantage of company tax rates for small business. Companies also exist in perpetuity, allowing for succession planning and the possibility for business sale in the future.
While there are many advantages, there are upfront and ongoing costs involved in creating and administering a company which business owners should be aware of. A company must keep financial records up to date, and lodge annual tax returns and reports to ASIC.
What is actually involved?
Before you incorporate
There are a number of key considerations (in addition to a company name) that you will need to think about before setting up a company.
Firstly, you will need to decide how your company will be governed. Your company can be governed by:
- replaceable rules - these are a basic set of guiding rules included in the Corporations Act for managing your company
- its own constitution - set your own rules, or
- a combination of both.
Note: special rules exist for sole director/shareholder companies.
If your company has more than one shareholder, you should have a shareholders agreement in place. The agreement may contain clauses on the roles and responsibilities of shareholders, how your company will be managed, how disputes are to be resolved, the rules and requirements around new share issues, selling shares, and how to handle a takeover offer.
Officeholders (Director/(s), Secretary & Shareholders)
If you are a company director or officeholder, it is important to understand your duties under the Corporations Act and general law, which include:
- ensuring company details are kept up to date
- maintaining company records and details on the register
- paying the appropriate lodgement fees and annual review fees as required.
- acting in good faith, exercising care and diligence, avoiding conflicts of interest; and not trading while insolvent.
Written consent will need to be obtained from all office holders prior to incorporating a company.
So.. Companies require more administration. What exactly does that mean, and what is involved?
1. Each year you are required to submit ASIC annual review paperwork, this is commonly done through your accountant on your behalf (ASIC admin fees are at the time of writing $267p.a. for a proprietary company see here for up to date ASIC fees) Your Accountant may also charge an administration fee for completing your company secretarial work on your behalf.
2. You will need to keep appropriate financial records and are required to submit an annual tax return for the company. This means accounting software subscriptions and associated tax agent fees.
3. Speak with your accountant to make sure you are compliant with GST and FBT rules and reporting (you are required to be registered and report on GST if your Annual Income is greater than $75,000)
How do I get started?
Together Business Australia offers personalised business structuring packages to ensure business owners have the most appropriate and effective business structures to suit their unique needs and goals. Get in touch today to find out how we can work together with you and your business.