Ever since I was little, I’ve loved the refreshed optimism that comes with a new year. These days it is more about renewed focus on my health and business rather than a new pencil case and exercise books, but the buzz is still the same!
A common NY resolution amongst my clients is to incorporate. Or at least reassess whether they need to. So here’s a little guide about whether it’s the right time for your growing business to get its Pty Ltd on!
Becoming an incorporated company will mean your personal assets are protected by limited liability, and your business will act in its own name as an independent legal entity (separate from you), that can earn income, pay expenses, pay company tax, sue and be sued.
An incorporated company will require more administration, expense and attention to detail than an unincorporated small business, and so you should be making upwards of $75,000 to justify the expense of setting up the company and register for GST and an ABN.
There are many benefits of incorporating
Asset protection may be the most important benefit. It means that if the company is sued, owes money or goes bankrupt, your family home or other personal assets will not be accessible to creditors – only company property and money is at stake.
If your company is based in Australia, your company will be taxed at a flat rate of 30% of taxable income (or 28.5% for small businesses with an aggregate turnover of less than 2 million per year), whereas unincorporated businesses are taxed at the individual marginal income rate. If a company is sold it may allow for tax concessions for shareholders, and companies may also qualify for tax deductions that are unavailable to other business owners.
An incorporated company gives outsiders an impression of ‘seriousness’ that a mere registered business name cannot. It costs more to set up a company than to register a business name, and incorporating shows others your business is a professional venture with longevity. This is very valuable if you are hoping to attract outside investment/capital. Investors will be confident they will not be legally obliged to contribute further funds to the company (in addition to what is already paid for shares) in the event the company runs into financial difficulties. If the business was to be run as a partnership with the new investor, they would be fully exposed and liable for debts.
In terms of transfer of ownership and control, shares act to facilitate possible sale of the company in whole or in part, as you can sell all shares, or just some. To bring in new owners, the current shareholders can choose to transfer all or some of their shares to the new shareholders, or the company can issue new shares. Day-to-day control of the company can be modified as desired by way of resignation of co-directors and appointment of replacement or additional directors. The company exists indefinitely unless wound up irrespective of retirement or death of managers, directors, and shareholders.
Tax-wise, an incorporated company will be taxed from the first dollar of profit with no tax-free threshold (small businesses have a tax-free threshold of almost $20,000). Companies must pay tax on assessable capital gains tax (CGT) (small businesses get 50% of their capital gains tax-free), and companies do not get PAYG instalment concessions available to unincorporated businesses.
Generally, there is more paperwork and cost associated with running an incorporated company. In terms of tax returns, a sole-trader business only needs to lodge an individual tax return (including business income and expenses on a separate business schedule). A company needs to lodge a separate company tax return, and you also need to lodge your own personal return as an individual for income earnt via wages, shares, dividends or loans received from the company or any other income sources. If you are a director, some benefits may be subject to FBT, and an FBT return must be completed if you have liability. You must also lodge a return for any associated trusts.
Steps to take to incorporate your business:
You may have already registered your business name and trading name but this and the company name must be registered with ASIC. You need to make sure the company has an ACN, an ABN and a TFN – all of which can be done on asic.gov.au and ato.gov.au. There is an ASIC registration fee, and an ASIC annual review fee that must be paid each year to maintain the company status.
For both companies and unincorporated businesses, you must register for GST if your turnover is $75,000 or more, (if turnover is below that it is optional to register).
- Consider share distribution
You can set up your company online, or with your accountant or lawyer. Usually Pty Ltd is put at the end of the name to restrict the number of shareholders to 50, and restrict the number of overall shares.
You then issue stock in the form of shares – the unit of ownership in the company. You must decide on the amount of shares the company holds, and their starting price or value, and divide them between the founders or parties investing. The shareholders’ names and number of units are part of the application.
If you are a shareholder, decide if shares are to be in your name or a trust’s name. Setting up a trust can incur more costs but is worth considering – speak to your lawyer about possible financial benefits.
- Establish directors
The directors are responsible for the corporate actions of the company and generally the decision makers. As discussed above the directors have asset protection – assets at risk are limited to company assets. However, directors do carry responsibility for their actions, and will be held accountable for breaches of the law.
It is possible to have one-person company, a single person as sole owner/shareholder and director as long as the company is treated as that person’s alter-ego; the company must act separately from that individual and must always act in the company’s best interest.