In this video Dannie McKinnon from The Field Group Accounting will be talking about the Company business structure and why you might consider structuring your business as a Company.
A Company is a separate legal entity and can incur debt, sue and be sued. The Shareholders of a company are its owners and can limit their personal liability and are generally not responsible for the company debts.
A Company must have at least one Director. A Director is responsible for managing the company business activities and must comply with their legal obligations under the Corporations Act. To become a company, an entity must be incorporated under the Corporations Act and register with ASIC.
For small business owners, the added compliance and director responsibilities when trading as a company means there needs to be a strong reason for a company to be chosen as your business structure over a Sole trader or Partnership.
Any profits the company makes are the companies. This is great where the business is reinvesting the profits into plant and equipment or maybe the debtors of the business are increasing. However when the Directors and Shareholders use these funds for personal use, either acquiring personal assets, paying off personal debt or our least favourite, on personal expenses, this can create taxation issues whereby additional wages or Dividends are required to be paid to the Shareholders/Directors to move the funds from the company to the individuals who have used the funds.
Another reason a company may be used for a small business for commercial reasons. By this we mean, a company gives a business more status when dealing with other businesses or the government. It may be that for a government contract that the small business needs to be trading as a company.
Some other factors to consider when considering a company are
- Losses carry forward indefinitely, while ownership is the same.
- Losses can’t be distributed to shareholders
- Easy to sell and pass on ownership
- Once tax is paid on profits and cash flow allows, the company can declare and pay franked dividends to shareholders, in some cases leading to positive tax outcomes for shareholders. (election)
- Significant set up costs and additional annual reporting requirements are the downside.
To learn about the other business structures available in Australia watch our other videos below:
TRUST - • Trust Business Structu...
SOLE TRADER - • Sole Trader Business S...
PARTNERSHIP - • Partnership Business S...
For more information visit fieldgroup.com.au
This document contains general advice only and is prepared without taking into account your particular objectives, financial circumstances and needs. The information provided is not a substitute for legal, tax and financial product advice. Before making any decision based on this information, you should speak to a licensed financial advisor who should assess its relevance to your individual circumstances. While The Field Group believes the information is accurate, no warranty is given as to its accuracy and persons who rely on this information do so at their own risk. The information provided in this bulletin is not considered financial product advice for the purposes of the corporations Act 2001.