by Gemma Williams
Whether you are in the start-up phase of your business, or you have been running your business for a while now, the question “should I operate as a company” is likely to have come up at least once.
Your reasons for considering a company structure for your business may be strategic, for asset protection, limiting risk or for tax purposes. As a business advisor it is vital for me to understand your business and your goals to ensure you have a structure that gives you the best opportunity to reach those goals. So, before we get to the “yes” or “no” answer, we first need to ask the “why”.
The strategic plan for your business is, in my opinion, the most important consideration when determining your ideal business structure. For example, your strategy may be to build and grow a business to sell one day, or your strategy could be to take on investors to grow your business. Strategic planning is all about developing a roadmap to guide your future decision making.
Having your business structure aligned with your strategic plan allows you to implement decisions and changes efficiently. However, the structure, like a strategic plan, should not be a “set and forget” exercise. The future is unpredictable, and they should both be reviewed when circumstances change.
Advantages of a Company Structure
One reason why you might structure your business as a company is to provide asset protection and limited liability. The company is its own entity for tax and legal purposes. Because a company is its own entity, shareholders are not liable for debts of the company. Generally, the same can apply for directors. However, it is important to note that under certain circumstances directors can be held personally liable for some debts by the Australian Taxation Office, creditors, and finance lenders.
Companies also pay a fixed tax rate compared to the marginal tax rates paid by individuals. So, there can be tax efficiencies to be had in trading as a company, however I will stress again the importance of seeking advice specific to your circumstances and not being influenced by the lower tax rate.
Another benefit if you are considering restructuring from a sole trader to a company is that, because the company is a separate entity, you would become an employee of the company. As an employee, you would be covered by workers compensation insurance (a policy must be held) and be entitled to compulsory superannuation.
If you currently conduct a business as a sole trader or partnership, it is possible to transfer the business to a company structure without capital gains tax being incurred.
Disadvantages of a Company Structure
One of the reasons why a company structure may not be ideal is the cost of maintaining a company, for example accountancy and ASIC fees.
Companies are also more regulated than other structures by the Australian Taxation Office and ASIC. Director or shareholder loan accounts can also cause issues and increase taxes.
How We Can Help
If you think your current business structure may not be aligned with your strategic plan, or if you are setting up a new business and want to speak with a business advisor who values your “why”, just contact Gemma Williams in the form below or call 02 4969 6600.