When commencing a business venture, it is necessary to consider the most appropriate type of business structure to put in place. Different business structures have different benefits and disadvantages. This article looks at companies – how to set one up and the pros and cons of a company structure.
Key Features
A company is a separate legal entity capable of holding assets in its own name and responsible for its own obligations. A company is owned by its shareholders. The liability of shareholders is usually limited to the value of their shares. This means that shareholders can limit their personal liability and are not generally liable for the debts of the company unless they give personal guarantees.
The company’s Directors manage the day to day business affairs of the company. There are a number of duties and obligations for company directors including an obligation that a director must act in the best interests of the company and must not continue to trade if the company is insolvent or unable to pay its debts as and when they fall due. There are substantial penalties which can be imposed on directors personally if they are found to have breached one or more of the director’s duties.
In Australia, the most common forms of company are:
- Private company (or a proprietary limited company (Pty Ltd for short): this is a company which does not sell its shares to the public and cannot raise money from the general public by issuing new shares.
- Public company: is a company whose shares are owned by the public at large, with the company’s shares usually listed for trade on a stock exchange.
Companies are regulated by the Australian Securities and Investment Commission (ASIC) and governed by federal legislation, the Corporations Act 2001.
How to Set up a Company
An Australian company must be registered with ASIC. When ASIC registers a company, the company will be given an Australian Company Number (ACN). An application for registration of a company must nominate a principal place of business and registered office for the company.
Prior to lodging an application for registration of a company, consideration should be given to:
- the proposed company name. A search should be undertaken to confirm the availability of the proposed name. If no name is specified in the application, the company will be referred to by its ACN. The company name does not necessarily need to reflect the business the company will be undertaking; the company can register a separate business or trading name with ASIC.
- that rules will apply to govern the company. This can generally be the replaceable rules from the Corporations Act (which means that the company does not require its own written constitution), a constitution or a combination of the two.
- who will be the shareholders and directors of the company.
A company needs its own Tax File Number (TFN), which can be obtained online from the Australian Taxation Office (ATO) and an annual tax return must be filed. Certain types of companies will also need to file an annual financial report with ASIC.
A company must be registered for GST if its annual turnover is $75,000 or more. An Australian Business Number (ABN) is required to register for GST and can be obtained online through the Australian Business Register.
Pros and Cons
The advantages of forming a company include:
- liability for shareholders is limited
- easier to raise finance for expansion
- ownership can be easily transferred and in some cases, there is no requirement to pay stamp duty on the transfer
- taxation rates can be favourable
The disadvantages include:
- expensive to form, maintain and wind up
- reporting requirements can be complex
- must publicly disclose key information
- shareholders cannot offset company losses against other personal income
Conclusion
A company might be a suitable business structure for unrelated parties who want to commence a business venture together, where there is a degree of risk and limited liability is wanted or where there is a desire to list the company on the stock exchange.
Establishment of a company and ongoing administrative and compliance costs associated with the Corporations Act can be high. An accountant or lawyer can help you understand the cost and risks of a company and explain whether a company structure would be suitable for your business going forward.
If you or someone you know wants more information or needs help or advice, please contact us on (07) 4724 1016 or email [email protected].
