Are you launching a new business? A necessary first step is to do your research and understand the different business structures available to you. This enables you to choose best a business structure that manages your risks, protects your assets, limits your liability, manages your tax obligations and gives you a strong platform for future growth.
In this series of articles on business structures, we are looking at the various structures through which you can run a business – a sole trader, partnership, company and trust. We are also unpacking each structure’s advantages and disadvantages. In our previous articles, we looked at running a business as a sole trader or partnership. This week, we will turn to look at running your business through a company structure.
What is a Company?
A company is the most common business structure for start-ups and SMEs. It is a legal entity in itself that is separate from its shareholders and directors. Shareholders own the company and have limited liability while directors run the company.
Advantages
We have outlined below the key advantages to running your business through a company structure.
1. Simple to Set-Up
You will first need to incorporate your company with the Australian Securities Investment Commission and have a company register. If there are multiple shareholders, we would also recommend you have a shareholders’ agreement. This should set out the rights, responsibilities and duties of the directors and shareholders. It will also include provisions regarding:
- Voting rights,
- Board meetings,
- General meetings,
- The decision-making process,
- Issuing new shares,
- Selling shares,
- Dispute resolution process,
- Intellectual property protections,
- Confidentiality, and
- Restraints.
A comprehensive shareholders agreement should include a dispute resolution clause to help resolve any future conflicts.
2. Limited Liability
A company is a legal entity separate from its shareholders and directors. If the company goes insolvent, the shareholders are protected. They will lose their investment in the company but are not personally liable for the company’s debts.
3. Investment
It is relatively easy to bring investors on board and you will have access to wider capital.
4. Transfer of Ownership
It is easy to transfer ownership of the business by selling shares in the company to another party.
5. Incentivise Employees
Employees may be incentivised to work hard with the promise of being given shares in the company if they, or the company, reach certain milestones or if they stay with the company for a certain duration. ‘Employee share option schemes’ are particularly popular amongst start-ups since the tax laws changed in June 2015 to provide employees with tax incentives.
6. Tax
Corporation tax rates can be more favourable than running a business as a sole trader or partnership where individual tax rates will apply.
Conclusion
We have outlined some of the many advantages to running your business through a company structure. There are, however, also disadvantages that we will consider in our next article.
If you are taking steps to set up your business or are considering changing your business structure, please get in touch! One of LegalVision’s business structuring experts would be delighted to assist you with comprehensive advice tailored to your needs.