Different Business Structures: Part 2: Company

A proprietary limited (Pty Ltd) company is an independent legal entity able to do business in its own right.

The shareholders own the company and directors run the company. The directors of a company, as well as company employees, can be shareholders.

A company’s operations are subject to the Corporations Acts 2001, overseen by the Australian Securities and Investment Commission (ASIC). This Act simplified regulations to allow a company to have only one director and only one member.

There are costs associated with registration a company and the company tax rate is 30% on all profits. However, a company often offers a greater level of asset protection as opposed to some of the other business structures, as our personal assets are separate from the business. With this in mind, major creditors will often require directors to personally guarantee the company’s liabilities.

Additionally, personally liability of directors and employee can also arise if they commit an offence under the Corporation Act 2001 or are found to have negligently performed their duties.

The advantages and disadvantages of a company are:

Advantages of Companies

• 30% flat tax rate applies.
• Can access CGT small business concessions
• Dividend imputation and franking credit refunds can reduce tax rate applying on ultimate distribution of profits.
• Can utilize FBT Salary packaging
• Profits can be retained in entity
• Losses can be transferred within a corporate group
• Can refinance working capital
• It is a separate legal entity and has limited liability
• Generally understood
• East to introduce equity participants.

Disadvantages of companies

• Cannot use 50% discount method to calculate capital gains tax.
• Division 7A applies to loans made to shareholders and associates.
• CGT small business concessions watered down on payments of amounts out of business.
• Cannot stream franked and unfranked dividends.
• Wages payment to associates limited to reasonable amount by s 109.
• Losses trapped within structure
• Complex rules on using and carrying forward losses.
• Relatively costly to set up when compared with sole traders and partnership
• Directors can be held personally liable for debts of company in some instances.
• Complex corporations law provision apply

Other articles in this series:

• Sole Trader
• Partnership
• Unit Trust
• Discretionary Trust

This article has been prepared for the purposes of general information and guidance only. It should not be used for specific advice or used for formulating decisions under any circumstances. If you would like specific advice about your own personal circumstances please contact our office.