The process of establishing a company is referred to as incorporation, and it is regulated by the Australian Securities and Investments Commission (ASIC).
You should also be aware that there are a few extra responsibilities if you decide to trade through a company. When discussing companies, you will hear terms like director, shareholder, dividend and franking credit – it is extremely important that you gain a good understanding of these terms, as well as your responsibilities, if you are looking at trading via a company.
In addition to holding a Tax File Number (TFN) and Australian Business Number (ABN) – each company is issued with an Australian Company Number (ACN). Each company is also required to lodge its own income tax return, and it is responsible for paying income tax on its earnings.
The benefits of operating as a company include:
- there is a protection mechanism by way of limited liability ie: shareholders of a company are only liable for any unpaid amount on their shares and personal assets are not at risk
- as a company is a separate legal entity, it can employ both directors and/or shareholders and pay them a wage or salary (unlike the sole trader and partnership structures)
- income tax is paid at a flat rate (currently 30%), which is often less than the applicable rate for individuals
- any spouse, partner or child can be issued with shares which allows income to be diverted to these parties by way of dividends, and;
- due to the regulation surrounding companies, management is often more organised which may result in formalised decision making processes and structured operations
Disadvantages of operating as a company include:
- a company is expensive to establish and maintain (compared to other structures) – there is an establishment fee and ongoing fees payable to ASIC and often legal and accounting fees are higher due to the complex nature of work to be completed
- the profits of the business are locked into the company until such time as they are paid out to shareholders as dividends, and:
- increased compliance required with government legislation is very time consuming and sometimes owners of businesses operating as a company feel overwhelmed by “red tape”
If you’d like to discuss your business operated as a company, please complete the Contact page.